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Teekay: Irrational Sell-Off As Transition Continues

Mar. 01, 2018 5:48 PM ETTeekay LNG Partners L.P. (TGP), TKTOO174 Comments


  • Teekay Corporation (TK) is a project development and management firm with major stakes in the LNG transport, offshore production, and crude tanker shipping industries.
  • Although TK tends to trade in correlation with oil markets, their primary asset is ownership in Teekay LNG Partners (TGP), including potentially lucrative Incentive Distribution Rights (“IDR”).
  • We’ve previously shared our extensive thesis for an eventual distribution restoration at TGP. Such a scenario would drive significant upside to TK.
  • TK & TGP reported their results last week. Upon review of the financials and significant refinancing transactions, TGP appears to be on track for massive DCF growth.
  • This report reviews recent progress at TGP and also discusses the illogical market reaction to TK’s prudent equity raise. I believe TK has 70% one-year upside.

Photo Credit: LNG World News

Review of Teekay Investment Thesis

Teekay Corporation (NYSE:TK) was our top idea for 2017, which was based on the prospect of stabilization and major growth at Teekay LNG Partners (NYSE:TGP) leading to an eventual significant dividend raise and a massive revaluation of the GP/IDR controlled by TK. We’ve released nearly a dozen full-length public and private reports over the past 18 months, chronicling the transition of TGP from nearly $2B in unfunded expansion capex and additional looming 2018 refinancing obligations of over $1B, to a healthy growth company with the largest LNG backlog and modern fleet in the public markets.

Our thesis has always been that TGP would survive and would be able to fund the entirety of their order book without equity dilution. We also believed the remaining 2018 maturities wouldn’t provide serious concerns due to underlying asset coverage. Although we were too optimistic in our initial forecasts and didn’t anticipate the depths of TGP’s related LPG trade exposure, thus far the operational and financial execution at Teekay LNG Partners has been to near perfection.

Although we like TGP as an investment, I believe the far greater upside is via an investment in the General Partner (“GP"), Teekay Corporation, due to their potentially lucrative incentive distribution rights (“IDR”). When a limited partnership, such as TGP, pays out large distributions, the GP makes significant profits due to the IDR structure.

The current trend of GP/LP firms has been towards simplification of the capital structure. This often means the LP will 'buy out' or repurchase the GP/IDR from the parent asset, creating a more competitive structure for future investors. I believe such a move by Teekay could lead to significant near-term upside for TK shares. As I discussed in a major report last month, such a

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This article was written by

J Mintzmyer profile picture

J Mintzmyer specializes in deep value stocks in the maritime shipping sector. He is a PhD Candidate at the Harvard Kennedy School, where he researches sanctions and the impact on trade flows. Previously, he earned an MPP from the University of Maryland, worked as a research intern with the White House Council of Economic Advisors, and earned a Bachelors in Economics from the U.S. Air Force Academy.

J is the Founder and Head of Research of the investing group Value Investor's Edge, a deep value research community focused on maritime shipping. He leads a team of six analysts and experts who focus exclusively on maritime shipping and related energy infrastructure. The team has delivered consistent outperformance since launch in 2015. It offers exclusive analytics, research reports, earnings coverage, and a live chat with an engaged community of more than 750 members. Learn more.

Analyst’s Disclosure: I am/we are long TK, TGP, TOO. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (174)

Hi Gerri, not so sure.

Market is not supporting this stock lately. It's extremely cheap since management is not reliable enough.
TK chart looks like very weak. Seems it's gonna break 7,5$ level.

Unless one/several FPSO are sold, this stock is forgotten for the next months.
J Mintzmyer profile picture
Oil prices = money printing. Q3 could be a monster if we stay in the $70s.
Should be.

TGP Q2 is forecasted fairly flat.
TNK Q2 is forecasted horrible since spot rates are very low.
TOO Q2 is forecasted flat.

Fort next 6 months, it's dead money and Mt Market is punishing these stocks.
Gerritjan Boeve profile picture
Wouldn't say dead money; Q2 predictions could be a game changer. Also believe Kenneth said we would get more info about TK's FPSO's re-contracting/selling.

And as Mintz says, these oil prices are a blessing for TK.
lahdesa profile picture
Thank you !
Trading heavily below NAV !
lahdesa profile picture
Anyone, how do a get TGP's NAV per share. That must have gone up nicely, and will continue doing so.
J Mintzmyer profile picture
I estimate charter-adj in the lower/mid-$20s.
J Mintzmyer
are you getting any TGP at these prices if not how much lower would it have to go before you did
J Mintzmyer profile picture
I bought today. Hadn't bought TGP in nearly 2 years.

No way $35. Even if TGP gets to the point where it pays .70 per quarter, doubt it will get above a price that reflects anything less than 10% yield. $25 would be more like it until TGP proves that it can and will support that distribution for years to come
JM? You agree?
and what if TGP decides to keep dividend in a low level (1$/year) and invest DCF in new growth projects?.

A the end of the day is not wasted money.
I think if they don't increase the div in Q4, unit price is going down to reflect a 10% yield like other shipping peers with long contracts (KNOP, HMLP, CPLP...). Market is already losing patience as the unit price decline shows.
I do not expect that, at all.

It would be dramatic for shareholders base.

My guess is a dividend rise to 1$/year and stock around 20$ with the carrot of a new dividend rise in 2020.
lahdesa profile picture
I am hopeful that TGP's Q 2 report shows big improvement in EBITDA and also DCF per unit, as many new ships will have had a solid period of operation. The comparisons should improve. Although I recall their distributable cash flow was at some 70 c/sh at its best, and since then it has been lower for reasons that just pop up.
The good thing is that there should not be new shares issued other than share-based compensation,
Joe,could you perhaps help and detail the new ships chipping in on Q 2, and the odd items likely to show up.
J Mintzmyer profile picture
They already provided guidance for Q2 alongside Q1 results, going to be fairly flattish q/q, the much bigger improvement is expected for Q3 after they take delivery of a couple more assets and repurchase some unsecured notes this fall (reducing interest expenses).

They also said they aren’t going to provide any guidance until November. Q2 likely to be a snoozer is most likely why the stock has stagnated here. Sort of a dead money pause...
J., these guys are focused on deleveraging balance sheet so they are kicking the can down the road once and once again for the last 18 months. And they'll continue for a while.

No party is forecasted until next year.

Key point is what are they gonna do with such amount of money: huge raise of dividend or mix across small raise of dividend and continue deleveraging and finance new growth projects.
my guess: not much dist movement until they have all new growth projects on line then big bump of dist so TK's IDR's pay out nicely

which is why TK did their recent equity raise- to cover them until later 2019/early 2020 when TGP will raise dist

so dead money until later next year/early 2020?
My best guess is with the slide in the Dow recently, TGP is an easy stock to sell with little risk that you would miss an uptick in price. Simply stated, there is little chance that TGP will raise its dividend within the next 90 days, or even before 2019. The LNG shipping market is not that strong as you imply and TGP has long term contracts that might still be operating at lower prices, or higher prices about to enter a lower market. Management has made clear that its priorities are refinancing debt, lowering its debt and financing growth. With an approximate 3.25% dividend yield for almost 3 years, there is a loss of hope that TGP will ever get back to its .70 per quarter dividend. So why not sell it looking for a better yield today?
Agree. Share price might go nowhere but down for a while. I was lucky (frustrated) and sold half of my shares last month. Thinking about buying some back given these levels, but one might make the case for TK as well if they believe in the story.

There is/was the CPLP story as well and look how that has played out.
J Mintzmyer profile picture
Pretty much dead money to at least November as clearly telegraphed by management. We could see a step-function price increase thereafter, but as noted above it’s a fairly ‘safe sell’ to then...
J (or anyone else, for that matter), any thoughts on the recent slide in TGP? Haven't read anything lately, but we're back below $17, and that's despite a still strong LNG shipping market overall.
Ashland Heights Investments profile picture
J, what is your take on the TGP Q1 announcement of $18M write-down on tankers and $53M allocation for probable tax liability?

J Mintzmyer profile picture
Tax issue/challenge has been disclosed for several years, but am slightly surprised, moreso disappointed, to see it veering in the negative direction. Definitely a negative overall, no doubt there!

The $18M write-down on tankers is totally expected and a non-issue. They will be completely divested of those legacy assets soon.
Ashland Heights Investments profile picture
It's hard to tell from the Q but it seems like the tax challenge will not be a cashflow item, but rather an earnings recognition item. So hopefully not a drag on the distribution coverage. Although, it could perhaps delay the foreseen increase in distribution.
Ashland, it will absolutely be a cash flow item if they eventually lose their appeal of the ruling - they will owe the additional amounts accrued to the lessor.

Perhaps more troubling, if you look at the risk disclosures in the 20-F, is that they have another similar JV tax exposure with respect to a joint venture in Indonesia. No details provided in the document regarding the amount of that exposure, so that is one more potential shoe to drop.
There were plenty of alternatives that they did not even entertain (other pe firms had interest, could have done a rights offering for TOO holders) - instead they gave away all the upside to Brookfield in a non-competitive sweetheart deal - and the stock has never recovered - if you think TOO’s abysmal share performance in emblematic of good management here then you’re ignoring basic, quantifiable facts...
I guess one's view of the management is colored to a large degree by the timing of your stock purchase. If you were unfortunate enough to buy TOO in 2015 at $10+ a share, then it's probably a lost cause at this point.

OTOH, if you bought more recently, then I think you might look at it from the perspective that DESPITE the current TOO management team, there is still a likelihood that the stock might be $4-5 a share by 2020. With a cost basis of less than $2.50, I'm willing to tolerate some management ineptitude for the reasonable possibility of a double in two years.
J Mintzmyer profile picture
As a $TK investor starting in late-2016, and a Teekay observer for many years, I always viewed $TOO as an unfortunate member of the family and wished it could simply “go away.”

Now things have changed and I’ve been long $TOO more recently. Brookfield got the best end of the deal, but that’s how distressed deals work. It could have ended much worse...
TOO is a bargain at this SP level.

650M$ EBITDA is fairly achievable this year, so EV/EBITDA is 6,6.

Balance sheet is pretty leveraged, so potential in Stock Price is huge.

Reaching 3,95$ means EV/ EBITDA < 8.

Extremely cheap, makes no sense once BBU is on the driver seat.
“Irrational” selloff becomes more “rational” when the appropriate risk weighting to this awful management team is applied...none of these clowns have bought stock in the open market EVER....next sweetheart Brookfield style deal that comes across their desk, they’ll crush you again...and then award themselves hefty equity comp as their just reward....just terrible
HunterKiller89 profile picture
The Brookfield deal was a positive catalyst for TOO and TK, and share prices moved as such. If that's what you mean when you say "crushed", I'm open to being crushed any day.
with Brent at $80, and offshore market gaining momentum, TOO is a jewel that TK sold out for two cents. TK maybe didn´t have a chance, but Brookfield got "the deal".
HunterKiller89 profile picture
Agreed, Brookfield ALWAYS gets "the deal", but it was still a positive catalyst for TOO and TK, as it was apparent TK would be too financially stressed to save that jewel. Better to get something less than it's value, than nothing at all.
pro8 profile picture
Doubled down at $7.70.... short term minor neg with TNK probably gave me my last chance to purchase in the $7 area..
Jay what are the risks for TK and how substantial are they? Darren recently mentioned them in an article where he had TK listed as being "very risky". I believe you chimed in to demure with that categorization. But could you outline what the risks may be and if possible how bad things might get if they unfortunately came to fruition. I had not previously understood TK to be very risky. Thank you.
J Mintzmyer profile picture
I don't view TK parent to be 'risky' at all in the broad sense. Sure it's speculative because they own a piece of struggling TNK, they own a chunk of TOO, which needs strong oil markets, they are the GP of TGP which needs to finish growth and significantly boost payouts...

So there's lots of speculative transition stuff, but in terms of big risks or 'dangers,' in April 2018 there isn't a lot left.

The biggest two were:

1) TOO borderline insolvency/crisis with $200M+ in related debt and a few hundred million of debt guarantee overlap - this was fully resolved in summer 2017 with the BBU injection into TOO. TK no longer has meaningful exposure there.

2) Huge ($593M) debt maturity in January 2020. This risk was mitigated significantly by the $100M equity and $125M convertible issue in early-2018. The raise came as a bit of a surprise to us because I expect them to address in 2019 with stronger markets as a tailwind, but the overall move (reducing net debt) was quite welcome.

Going forward, TK itself doesn't have a lot of risks, but the biggest swing factor are their 3x FPSOs, all of which have an oil price-related 'bonus' tariff. At $70+ Brent, TK is raking in the cash flow. If oil plunged back to $55 and they couldn't sell or recontract those FPSOs, that would be a negative.

Another risk is TNK. They have a very risky balance sheet and they are facing a very tough run if rates don't improve quite soon. TK might need to inject a small amount of money ($50M-ish) to help them out.

Nothing existential, but with TK the issue has mostly been the pricing rollercoaster. Buying at $6 and selling at $10 has been a clear winner in hindsight (not my approach, I've owned the majority of my shares for a very long time). Eventually this will be $12-$15+, but the timeline has taken longer than expected and the market is clearly skeptical with TK trading at $9 with these sorts of oil prices....
pro8 profile picture
The market is very skeptical of many types of oil companies...it makes waiting and requires patience for a move before a negative comes along OTOH if you are buying in at these levels as long as no recessions or Black swans within about 2 or 3 years years I think you will be very well rewarded.
After some dithering between here (8.97) and ~8.70, the next move is higher, and you get a 10-handle. Do you like 10%, and the long-term promise of much more? Thanks JM for all you do.
joeri/JM, what are your current price targets on SSW? Debating selling out of that to purchase some more NMM. Avg cost of 6.68
Joeri van der Sman profile picture
I’m not long ssw at the moment.
Back over $9 this afternoon - does the MS analyst still have this called as a short/sell?
Joeri van der Sman profile picture

Yesterday premarket the same analyst also put NMM on an underweight with a 1.8$ target.... Not exactly the sharpest guy...
Joeri van der Sman,
id like to ask a question about TK
at what price point would you start letting loose of you're TK shares
Joeri van der Sman profile picture
Maybe something like 13.
news on FPSO's?

Terrible markets to do this kind of deal.
Shorts also increased..
J Mintzmyer profile picture
Almost all shipping names had a very bad PM along with down pressure from MLP, look at SBLK for instance.
@J Mintzmyer...Here we go! A P&F breakout!
May have caught a cold from the MLP flu..
Night Shadow profile picture
the only news I can see is the change in the board of directors, trying to find more info on it
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