Teekay Corporation: Top Idea For 2017, Catalyst-Driven 3x Potential

Summary

• Teekay Corporation is a massive shipping holding company focused on major global projects including LNG transport, offshore oil production, crude oil transport, and maritime logistics.
• TK is the general partner and major unitholder for two primary 'daughter firms:' Teekay Offshore Partners (TOO) and Teekay LNG Partners (TGP). The combined group has a $20B backlog.
• The extreme high-yield and oil-related panic in late-2015 led to management's decision to slash subsidiary payouts by 80% and parent-level payouts by 90% in order to self-fund remaining growth.
• This decision led to an enormous revaluation, from $30-40 to $6-11. With growth financing practically complete, distribution growth is likely to return by mid-2017.
• Distribution recovery could lead to massive revaluation as TK will return to cash flow potential valuation. TK is my top idea for 2017: One-year target of $18+.

Note: The following report reflects my personal opinion only. I've spent months developing this thesis, but the included valuation targets are purely driven by my opinion of this firm. All investors should always conduct their own full due diligence before making any allocation decisions. Nothing in this report reflects an investment recommendation on behalf of J Mintzmyer nor Mintzmyer Investments LLC. Members of Value Investor's Edge received a first look at this report.

Overview

The following report reflects my bullish thesis for Teekay Corporation (NYSE:TK), which is my top idea for 2017. I have been developing this thesis and increasing exposure during the past few months as TK's prospects continue to improve at a steady pace while the share price has languished. The precise timing of this report was spurred by Seeking Alpha's "Catalyst-Driven" contest.

Our bullish thesis on TK:

TK's future valuation is nearly 80% dependent on cash flows and ownership stakes in its two partnership 'daughter' firms: Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO). When TK traded based on this method of valuation, between 2010 and 2015, the shares traded between $21 and $67. Over the past 11 months, spurred by a dividend cut, TK has been erroneously revalued by virtually all mainstream analysts based on its own limited operating assets. TK stock has recently traded in tight correlation to oil prices, while the vast majority of Teekay Group's $20B fee-based backlog is not directly related to the current oil pricing.

TK's operating assets and TNK stake are worth under 20% of the upside target price. This flawed 'mainstream' valuation and erroneous trading correlation to oil has led to TK trading between a range of $6 and $11 since December 2015. During 2017, TK daughter TGP is likely to fully restore its distribution payout, which will lead to a gigantic shift in market perceptions and valuation models. The same analysts who valued TK as 'outperform' at $30-40/sh in 2014-2015 are likely to return to their original cash flow based models. If this shift in sentiment and revaluation occurs, I believe TK will be nearly a triple, perhaps better (from $6.64) by the end of 2017.

TK is my largest speculative position and is the largest exposure I have ever taken in a publicly-traded venture. This report serves the dual purpose of participating in Seeking Alpha's 'catalyst-driven' contest while also allowing me to share our top long idea for 2017.

TK's Current Valuation: Operating Assets and Basic 'SOTP'

TK's current valuation regime is based on fluctuating opinions and implied valuations of its own operating assets coupled together with the current market value of TK stakes in its three daughter firms. I refer to this as the basic sum-of-the-parts ("SOTP") model.

TK's operating assets are essentially just three floating production storage and offloading ("FPSO") vessels: the 'Petrojarl Foinaven,' 'Hummingbird Spirit,' and the 'Petrojarl Banff.' The original plan, prior to last year's high-yield meltdown, was for TK to drop-down all three of these assets to TOO. This would have concluded TK's long-term transformation into a net debt free holding company and general partner (ref: Q3-15 TK Presentation).

The trio of these FPSOs reflect less than 20% of the long-term cash flow potential of TK Parent. The remaining 80% of upside potential is based on its major stakes in two partnership 'daughter' firms: Teekay LNG Partners and Teekay Offshore Partners. Teekay Tankers (TNK) gets a lot of attention and it has suffered through a rough 2016, but it is virtually meaningless to future valuation. Even if TNK went to $0, this impacts future valuations by barely more than $1/sh. TK is the general partner ("GP") for TOO and TGP, and benefits from a structure known as incentive distribution rights ("IDR"). When these two firms distribute large amounts of cash flow, TK is eligible to receive substantial percentages of these payouts.

Prior to the high-yield chaos and MLP meltdown of late-2015 and early-2016, TK was valued on these cash flows and its forward upside potential. TK's own operating assets were placed in their rightful zone, as minor afterthoughts, expected to be eventually dropped down to Teekay Offshore. Between 2010 and Q2-2015, TK traded in a far higher range, between $21 and $67. All of this changed exactly 11 months ago, when TK plummeted from $28 to $7 in a matter of two weeks.

This plummet was inspired by a massive 90% distribution cut as Teekay Group had to take drastic action to fill a medium-term funding gap as the equity markets slammed shut. This distribution cut led most analysts to value TK almost exclusively on basic SOTP, leading to massive price target cuts. TK's trading patterns have since been almost fully correlated to oil prices, and the stock has traded in an approximate range of $6-11.

Mainstream Analyst Reversal: Cash Flow to Basic SOTP

The aforementioned massive dividend cut in late 2015, led to a massive exodus of analysts. As illustrated by the snapshot from Yahoo Finance, five firms immediately downgraded TK from "Outperform" to "Neutral." TK was apparently an outperform at prices ranging from $25-40, but was suddenly a market perform at $8? This is because the dividend cut resulted in a fundamental mainstream revaluation of TK, from a GP cash flow multiple to an operating asset and basic SOTP model.

With the SOTP model as their guide, these analysts were 100% correct that TK's performance over the next year would be 'Neutral.' In fact, TK stock has actually declined over the past 11 months due to oil correlations.

Once the final growth funding gaps are filled and distributions are restored, this valuation shift will be reversed. TK stock is poised to triple or better, and I expect mainstream analyst price targets to skyrocket.

Teekay Group: Huge Financing Progress, Market Sleeps

The shocking part is that Teekay Group has nearly completed all of its most critical funding initiatives over the past year - over $2.5B secured in the past six months and significant further progress reported in Q3-16. The market hasn't noticed any of it. The following is a direct quote from TK's Q2-16 results:

"These initiatives, together with expected operating cash flow and previously arranged debt facilities, are expected to cover all its medium-term liquidity requirements and fully finance all of Teekay Offshore's $1.6 billion of committed growth projects. Executing on Teekay LNG's robust pipeline of growth projects delivering through 2020 has also been a major focus area and Teekay LNG continues to make good progress on the financing for these projects. Since May 2016, Teekay LNG has secured lender credit approvals on over $900 million of new debt financings…"

The progress continued in Q3-16:

"Teekay LNG's growth projects are progressing as scheduled and significant progress has been made on securing the financing for these projects, including approximately $1.3 billion of new long-term loan and lease facilities expected to be secured over the next few months."

TK's stock price in mid-April 2016, when the entire portfolio of Teekay Group growth projects was arguably in jeopardy: $11+. TK now trades around $6.64. This is based on a ridiculous oil-price correlation that has very limited impact on its 20B in fee-based revenues (i.e. backlog).

TK's Recent Trading Pattern: Near-Direct Oil Correlation

TK has tended to trade around oil prices over the past year or two. This is apparent without even using precise methods as investors will note TK now trades around $6.64 and oil is approximately $44/bbl. The lowest point for TK shares during the past 11 months was during January-February when oil in the mid-$30s. TK hit its 11-month highs between mid-April and mid-June around $10-11 as oil also traded around $50 and OPEC talk turned bullish.

To prove the mathematics, I utilized a handy correlation tracker at buyupside.com. Over the past 13 months, TK's correlation with the Crude Oil Total Return (OIL) has been roughly 89.5%.

If this correlation is expanded to the past two years (12 Nov. 2014 to 11 Nov. 2016), the correlation increases to 92%. A simply remarkable tracking- near perfection.

This correlation is likely due to TK's classification as an "oil services" company. The first two sentences on the general company description at Google Finance, do little to dispel this:

"Teekay Corporation (Teekay) is a provider of crude oil and gas marine transportation services. The Company also offers offshore oil production, storage and offloading services, primarily under long-term, fixed-rate contracts."

Based on just those two sentences, investors can be forgiven for erroneously comparing TK to other oil-sector service provides like Schlumberger (SLB) or Halliburton (HAL). The painful irony is that these two behemoths are down only 15% and 1%, respectively over the past 18 months, while TK is down by 86%. Even frac sand provider Hi-Crush Partners (HCLP), a firm that has been utterly decimated by the shifting oil markets, has only dropped by 49%. HCLP slammed its investors with a full dividend suspension and its project pipeline and comparable positioning is laughable compared to Teekay Group's $20B backlog. If TK stock 'suffered' to a similar degree as HCLP, the stock would be $24.50 today, nearly a four-bagger from today's prices.

TK's valuation correlation to oil prices is borderline absurd, and is poised to change in 2017. Although TK's core operating business is related to oil production fundamentals, and deserves this correlation, these operating assets reflect only around 10% of its future cash flow potential.

Basic SOTP: Examining the Model

TK's valuation as a sum-of-parts entity includes the three aforementioned FPSOs (Foinaven, Hummingbird, and Banff), its ownership stakes in TGP, TOO, and TNK, and ignores the GP IDR upside in both TGP and TOO. IT also has general management agreements and a small stake in a tanker owning joint-venture, but these deserve minimal valuations.

The Trio of FPSOs: The Sole TK Operating Assets

The valuation of the three FPSO assets is certainly up for debate, and depends on what contracts can be assigned in the future. Comp-valuations would have easily exceeded $500M in 2014, but we are in a different market reality now. These are niche assets that depend on employment in specific offshore oil fields. Thankfully for TK and TOO, these are production-related assets with strong economic benefits and are nowhere near as risky or oversupplied as the exploration-related offshore rig sector.

The Foinaven and the Banff are on long-term charters and the Hummingbird recently signed a new contract pushing employment past the planned March 2017 expiration. Due to the lower oil price environment, these assets have produced far lower EBITA due to contracts related to the average oil price. These vessel valuations can fluctuate based on EBITDA potential and market pricing levels. I have reached the following valuation estimates based on a comparable transaction overview and EBITDA estimates.

Ownership Stake in TOO, TGP, and TNK

TK currently owns approximately 25.2M units of TGP, 38.2M units of TOO, and 40.4M shares of TNK. The current valuation breakdown is shown below.

Basic SOTP- prior to IDR Inclusion

The following chart highlights the current SOTP valuation, which includes zero valuation for the IDR agreements and also includes zero additional valuation for the inherent control premium in all three of these firms. I believe a minimum 10-20% additional valuation is fair.

The roughly $6/sh valuation, which can arguably fluctuate between $5-7 based on FPSO values reflects the current mainstream analyst valuation regimes. I've talked with several public analysts and read their reports- their conclusions are very similar. This approach values the TGP and TOO IDR at close to $0 even when the exact same firms valued TK based on potential cash flow just one year ago.

The IDR Upside - Massive Potential at TGP

The enormous upside at TK lies in its GP IDR structure. This structure is included with both TOO and with TGP, but the former company is likely further away from restoring its distribution as covenants included with some of its 2018 debt require continued paydown prior to distribution increases. TGP, on the other hand, has now fully financed its new-build program, and is likely to increase its distribution level by as much as 5x prior to the end of 2017.

Previous TGP Coverage

I previously wrote about TGP on 9 September 2016 via an 18-page report selected for SA PRO. In that report, I suggested a $25/unit fair value target, likely reached in under one year. Highly respected SA author Rida Morwa also followed up on TGP at the end of September, also concluding in his report:

"TGP offers investors the chance to double their money, and could see its distributions grow substantially, resulting in a 22% yield based on the current share price."

Subsequent to my report on TGP, Wells Fargo analyst Michael Webber also upgraded TGP to "Market Outperform" and included a NAV estimated of over $21/unit. Webber concluded:

"In addition to the attractive valuation and gradually improving financing picture, we estimate distribution coverage ratios between 6.68x - 7.98x for TGP through 2017, with that surplus cash likely used to minimize the risk of a near-term equity need."

All three of these reports were independent. This reflect the fact that TGP's undervaluation is now a known quantity and that expectations for a distribution increase are not isolated to my personal, albeit first, viewpoint.

TGP's IDR Structure

As general partner at TGP, TK benefits heavily from distribution restoration. This IDR structure is shown below, taken from TGP's latest annual report (form 20-F: page 63).

Prior to late-2015, TGP was paying out $0.70/qtr, but this rate was reduced to $0.14/qtr to allow TGP to self-fund the rest of its growth program through 2019. This greatly reduced TK's proceeds as its marginal payout rate crashed from 50% down to 2%. The payout history since 2013 is shown below, courtesy of Nasdaq.

TGP has since fully funded its growth portfolio, which included a $125M preferred equity issuance and a $110M Norwegian bond issuance. The latest slide (#5), from TGP's Q3-16 presentation, confirms the entire program is on track.

With the new-build program on track, resuming the distribution back to $0.70 is feasible by mid-2017. At a $0.70/qtr payout, TK is eligible for 50% of all future distribution increases, and receives an average payout of 10.5% of all cash flow. The red shading reflects the current payout ($0.14/qtr), the yellow shading reflects projected payout capacity by late-2017 ($0.70/qtr), and the green shading reflects projected payout capacity by end-2018 ($0.85/qtr).

With approximately 80M units outstanding, these payout levels can be derived into specific amounts that TK expects to receive.

TGP's Massive Impact on TK's Valuation: Mid-2017 Window

The numbers are simply shocking. TK trades at $6.65, but could be receiving annualized cash flow of approximately $1.13/sh, within one year. What is a fair value for this IDR upside? Analysts used to believe well over $1B. They now think it's speculative and should be valued near $0. The following is a valuation matrix table. I've included the $0.65-0.85 range across a broad level of discount rates ranging from 6.7% (15x multiple) to 16.7% (6x multiple). Remember this cash flow is nearly 100% profit margin as TGP pays for all of its own G&A expenses. TK still has corporate overhead, but it's fairly miniscule and is easily offset by its three FPSO assets.

As the matrix illustrates, a valuation of 8-12x cash flow across a $0.65/qtr to $0.85/qtr TGP payout results in a valuation range of $656M to $1.7B, with a midpoint future valuation of $1.18B. TGP's valuation under the basic SOTP model is currently $340M. I believe the proper valuation today is approximately 8 turns to a $0.70/qtr payout ($770M), but I expect the market to ultimately give TGP over 12 turns or better on even higher payout levels once the distribution has been established, proven stable, and as growth is expected to continue through early 2020.

This report discusses TK upside at the end of 2017, so I believe the mid-point ($1.18B) is feasible by that point in time. By 2019, it's feasible that we could see a valuation over $1.5-2B on the TGP ownership alone. That sounds wild, but remember TK traded near $50/sh just 18 months ago. The mainstream valuation approach completely flip-flopped and I believe it's likely to do so again in the future.

If this $770M is inserted back into the basic SOTP model instead of the current TGP unit market-price valuation of $361M, this alone drives TK's value to $9.70/sh. With the mid-point of the aforementioned valuation range ($1.18B), TK's forward (one-year) value improves to $14.51 before looking at anything else. That's prior to including the additional bullish upside at TOO, accounts that TNK shares are barely off decade lows, and also includes the FPSO assets at fairly conservative valuations.

Additional Upside from TOO: Mid-2018 Recovery

Similar concepts apply at TOO as TK owns a massive chunk of regular units (38.2M) and has a similarly lucrative IDR. This structure is disclosed in TOO's latest annual report (20-F: page 70).

Similar to TGP, Teekay Offshore cut its distribution by 80% last November, from $0.56 down to $0.11. The history from 2013 is shown below courtesy of Nasdaq.

Unlike TGP, which, I believe, has the potential to easily cover a $0.70/qtr (full payout recovery) by mid-2017 going forward, TOO is likely to have more difficulty. Over the past three quarters, TOO has averaged $0.41/unit in distributable cash flow. Its funding gap required dilutive equity raises and additional convertible preferred units, which further cripples some of its upside.

A return to the $0.40/unit range is feasible by mid-2018 as debt paydown issues are likely resolved and additional expansion projects come online; however, the extremely lucrative $0.525/qtr and higher payouts are not likely in the medium-term. This means the IDR aspect is less of a factor and standard ownership payouts are more realistic. The following table reflects TOO marginal and average IDR payout potentials. As should be clear, the IDRs are unlikely to have any near or medium-term impact.

As previously alluded, part of TOO's revaluation headwind is due to forced dilution, which led to the issuance of units at $4.55 along with warrants to purchase additional units between $4.55 and $6.05. I estimate TOO has a fully-diluted unit count of approximately 150M if all units are converted and all warrants are exercised. This reflects total survival dilution of 22% over the past year (compared to 117.4M at the end of 2015) whereas TGP has essentially avoided all direct equity dilution. The net results are shown below. The IDR-driven upside is enormous, but I don't believe it's appropriate to include that in current valuation targets.

These payout levels can also be directly valued on cash flow multiples, but due to TOO's smaller respective backlog and longer pathway to distribution recovery, I believe lower multiples (6-10x turns) are in order.

Even with the conservative valuation approach and the smaller target payouts, TK's stake in TOO is still worth between $297M and $660M. The midpoint of $479M compares to a current basic SOTP of $260M. If we push the timeline further towards 2019-2020, then it is feasible that we could see higher multiple valuations on payouts exceeding $0.56 - this could improve TK's value by over $1B. Since this report focuses on an end-2017 (one-year) valuation, I'm not including that potential upside in my price target.

The core thesis which makes TK my top idea for 2017 is that a TGP dividend recovery will occur by mid/late-2017 and will drive a full revaluation of Teekay Corporation. This revaluation is hardly unprecedented; it is precisely the inverse of what happened on 18 December 2015 when Teekay Group shocked the investment world with its decision to self-fund future growth requirements. Just as analysts immediately shifted their models from cash-flow to basic SOTP, they will once again, albeit likely a bit slower, shift their models back from SOTP to a cash-flow model.

Teekay Group has seen its combined market capitalization drop from over $11B in 2014 to under $3B today. Meanwhile the combined backlog has held steady, at roughly $20B. The growth portfolio is now fully-funded and is coming online at a steady pace through the end of 2019. Teekay hit a massive speed bump when the high-yield markets crashed in late 2015, but its cash flows are intact and it has now rectified nearly all of the funding gaps.

All that has really changed over the past two years is the level of distribution and the corresponding market valuation.

Pay big, get valued on cash flows that assume big payments forever; pay small, get valued based on a simplistic model that assumes small payments forever.

When the Teekay Group companies once again 'pay big,' the valuation regime will likely follow right behind. My end-2017 valuation model is shown below, which also holds all of TK's other assets flat. This version holds the net debt flat and FPSO assets flat, which is simplistic and doesn't reflect the reality of TK's long-term transition plan.

This valuation model reflects my rough proxy for where I expect TK to be valued by the end of 2017: my one-year price target for TK shares is $18, roughly a triple from current levels.

If the FPSO assets are sold off by late 2018 and TK transitions to a net debt free holding company, the share valuations creep higher under a similar model.

With TGP paying $0.85/qtr ($3.40 annualized), TOO paying $0.40/qtr ($1.60 annualized), and net debt paid to zero, the late-2018 TK valuation improves to $25/unit.

Risks to Revaluation

Delay in TGP Distribution Recovery

I've previously discussed the TGP upside and related-case extensively in this 18-page report. I have full confidence that TGP will eventually restore its distribution to $0.70/qtr and likely grow it far higher as all growth projects deliver through early 2020. I personally believe that TGP will restore the distribution to either $0.65 or $0.70 in mid-2017, likely announced in August, but it is feasible that management will decide to either raise the dividend to a medium-level first or that it will decide to delay the distribution hike by a few subsequent quarters.

Although a delay doesn't change the end-valuation for TGP or for TK, it does impact the timeline, and thus the current valuation of these firms. Considering TGP trades at $13.50/unit, the stock market clearly doesn't agree with my opinion that distributions could reach $0.70/qtr by the end of 2017 (21% forward yield). I've shared my public thesis on TGP and the market seemed to shrug it off suggesting a wide level of disagreement.

TK might never be valued on cash flows again

Every mainstream analyst has shockingly lower price targets and I haven't found a report yet that gives TK substantial credit for what I believe is enormous IDR upside. Although TK was arguably valued under this regime for at several years prior to December 2015, it is possible that the 'dividend shock' has permanently destroyed the market's confidence in this firm. TK might always trade along with oil prices and be valued on basic SOTP regardless of daughter-firm payouts. Even if this is true, I still believe TK will get a massive revaluation as both TGP and TOO are likely to appreciate in unit price if their payouts accelerate. This still leads to far higher TK valuations even with $0 ascribed to the IDR benefits.

TOO has restrictive debt covenants that also restrict TK's payouts

During mid-2016, TOO was able to push some of its debt maturities back to 2018, but specific covenants on the Norwegian Kroner-denominated ("NOK") bonds prohibit TOO from increasing its distribution past $0.11 until all of that debt is repaid. Furthermore, TK is restricted from paying out any cash to common shareholders unless it subsequently issues offsetting fresh equity. TK has a $50M ATM facility to allow it to keep the $0.055/qtr payout, but both TOO and TK obviously aren't going to raise their payouts until after the 2018 NOK bonds are repaid. If TGP raises its distribution first, TK will likely use its proceeds to pay down net debt.

The three FPSO assets could weigh down TK

Although two out of the three FPSO assets are fixed until 2020, the environment for these types of specialty assets is niche and broad concerns have led to revaluations of these assets. I believe my $440M en bloc valuation is a fair assessment of current value considering the contract backlog, but these valuations could go definitely go lower if the oil markets continue to stay very difficult. I’ve also seen third-party reports that ascribe far lower valuations to these assets based on tiny multiples attached to worst-case EBITDA forecasts. Those multiple are vastly off from peer comps, but there are certainly lower estimates out there. The terms of the recent Hummingbird Spirit extension are not clear and I’m not very bullish about near-term results from that asset.

Massive, surprising, Fed rate hikes could crush high-yield ("MLP-type") valuations

My valuations reflect yield demands of 10-17%, which I believe are incredibly high for nearly pure profit margin cash flow, but these are also extremely high yields in comparison what has been a nine-year period of near zero interest rate policy ("ZIRP"). If the ZIRP regime rapidly shifts upwards, perhaps spurred by surprise inflation or executive pressure, then it's feasible, albeit unlikely that these types of assets will be valued at doubt-digit yields. This sort of revaluation would make it difficult for Teekay Group to fund its operations via equity, and would limit future upside beyond a valuation in the mid-teens.

There are always market-related and unforeseen risks in any investment idea, this list of risks is by no means exhaustive, but the list does cover all of the broad primary concerns I've uncovered over my research into TK during the past few months.

Wrapping Up: Catalyst Contest Criteria

Since this report serves as both my personal disclosure of my top idea for 2017 as well as my entry into Seeking Alpha's current contest, this review will reflect on each of the key criteria points. I've been developing the TK thesis privately for months, but decided to shape my final public report along these criteria.

1. How strong and effective is the case that the catalyst will happen, that it is not in the price of the stock yet, and that it will drive upside? Investors must make their own decisions regarding the catalyst-nature (IDR restart and subsequent revaluation of TK via TGP) of this investment thesis, but I believe the illustration of the basic SOTP model illustrates that there is virtually nothing bullish currently reflected in the current TK stock price. TGP alone gets TK to nearly a triple and TOO adds additional upside further down the road.
2. Do you make a clear case for why the market has this stock wrong? I've made my best effort to ensure the provided report walks potential investors through the current valuation regime (nearly $0 ascribed to massive IDR upside, which analysts and investors valued as worth several $B just 12 to 18 months ago) as well as the current trading reality (huge oil correlation). This report illustrates how the cash flow payouts, influenced by IDR structures carry substantial upside value for Teekay Corporation.
3. How is the risk/reward here skewed in investors' favor? Considering that the current TK price range reflects horrendous oil market projections and also reflects almost zero upside in any of TK's daughter firms nor in any IDR-related upside, the "risk" of buying TK at $6.64 is very limited. TK's riskiest component is reflected in its internal operating assets, which are responsible for well under 20% of future results and are already heavily discounted in the included 'basic SOTP'. Meanwhile, the reward from the potential return of IDRs and subsequent return to rational valuations starts around 3x and potentially shoots far higher over the long term. I believe the risk/reward in TK equity is among the best I've discovered in a publicly traded company over the past 10 years.
4. How material is your thesis to the stock's price? The current valuation regime is a basic sum-of-the-parts ("SOTP") with very little upside ascribed to the IDR. Mainstream analysts are currently valuing TK via this method even though the majority of models utilized cash flow multiples during the six years prior. TK's current trading pattern is also almost perfectly correlated to oil prices, which makes little sense due to Teekay Group's $20B backlog. The fundamental thesis of a return to the historical regime of cash flow yield valuations, is exactly what is required to move TK to far higher levels.
5. Do you present an original thesis on the stock? There isn't much public analysis on TK (there have only been three reports posted on Seeking Alpha over the past four years), which isn't too surprising as it's a rather complex firm to describe. This complexity is exactly why I decided to describe the upside at TGP first, since there is far less modeling and extrapolation required. Over the past year, I've talked offline with both a handful of industry analysts and have spoken to TK management. I've read several valuation reports from mainstream analysts who cover TK. All of these reports value TK based on its operating assets and current market share values of its three daughter firms (TGP, TOO, TNK). The key IDR are given practically $0 valuations by all the major analyst reports that I've read. To the best of my knowledge this is the first public report which argues that TK is fundamentally undervalued and is poised for massive revaluation starting in 2017.
6. How did readers and PRO subscribers react? I look forward to a robust discussion in the comments section. I believe there's a very strong case for this firm, and my money is fully where by 'mouth' is. TK is my largest speculative position. My one-year (end-2017) 'fair value' target is $18/sh.

Conclusion

I expect TGP to markedly increase its distribution level in mid-2017 and I expect TOO to follow sometime thereafter. This will likely lead to a massive revaluation of the entire Teekay Group, as all of the entities will likely once again be valued on cash flow potential. The first step of this revaluation leads to my end-2017 target of $18/sh, upside of 171% from today's price level.

I am proud to submit this report as our top idea for 2017 and I am grateful for Seeking Alpha for allowing investors the opportunity to both submit original investment analysis as well as for their efforts to provide extensive catalyst-driven research for members of this community.

Thanks to all who took the time to read this report, and I look forward to hearing your thoughts and sharing in a great discussion in the comments section below.

Top Idea for 2016

Our 'Top Idea for 2016' was Golar LNG Partners (GMLP). We posted our report on 18 December when the stock traded under $8 and closed at $10/unit. One year later, GMLP sits at $20.56 and has paid out $2.31 in distributions. That idea has produced a return of 186%, just shy of a three-bagger, in 11 months. Our price target, provided with our initial report, was $17.50/unit. This was a laughable target to many investors when GMLP traded at $7.55-10. I believe the risk/reward provided by TK at $6.64 is even better than GMLP at $8-10.

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Disclosure: I am/we are long TK, TGP, TNK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.