Image Credit: Teekay Corporation
Teekay LNG Partners Overview
Teekay LNG Partners LP (TGP) is a limited partnership managed by publicly-traded general partner Teekay Corporation (TK). TGP primarily owns specially-designed vessels for LNG transportation, but they also have a minor LPG fleet. The lion's share of the future business (over 90%) is squarely positioned in the LNG transport sector, which is perfectly positioned with $10B in future backlog. TK is the majority unitholder of TGP (roughly 32%) and they also control the GP/IDR, which will become a lucrative asset as DCF continues to grow.
Following recent repurchases, TGP now has 78.6M common units outstanding, for a current market capitalization of just $1.04B. They also have two sets of preferred equity, $125M in 9.0% Series-A (TGP.PA) and $150M in 8.5% Series-B (TGP.PB). TGP currently distributes $0.19/qtr, for a yield of 5.7%
Excellent Q1-19 Results
Teekay LNG Partners (TGP) reported a very solid quarter (Link to PR, Link to Presentation, Link to Transcript), arguably posting the best weighted (i.e. including stability of the company and forward prospects versus risks) result in the entire history of the company.
Yes, TGP just released the strongest results and guidance in the 14-year company history, yet we sit only a few dollars off all-time record low prices. TGP had traded quite well during 2019, rising off a strong Q4-18 result, but with trade war tensions rearing back up, they seem to have fallen easy victim for either risk reduction or trader profit-taking. Despite perfect execution, TGP is back in the same range as prior to Q4-18 earnings.
Source: Google Finance, TGP YTD Quote, annotations added
Specifically, TGP reported distributable cash flow of $0.69/qtr and rapidly rising earnings. Their presentation was exceptional, hitting all the key points on valuations, with the firm currently valued at just 9x EV/EBITDA.
Source: Teekay LNG Partners, Q1-19 Earnings Presentation, Slide 8
Cheap from Any Angle
Pick your multiple: either distributable cash ("DCF"), earnings ("EPS"), book value ("BV"), Net Asset Value ("NAV"), or Enterprise Value ("EV/EBITDA") and TGP trades between cheap and dirt cheap.
We're sitting at 9.0x expected EV/EBITDA for 2019. This of course goes even lower (lower is better for EV/EBITDA) into 2020 based on the virtue of nearly $100M more in EBITDA and $300M less of debt. GasLog Partners (GLOP), which has a considerably inferior fleet (comparative discussion here) and forward backlog trades in the mid-10x EV/EBITDA range. If we placed TGP into the same mid-10x EV/EBITDA range, we'd land around $30 for 2019, and closer to $40 by the end of 2020.
Calculation for YE-20: (EBITDA of $720M x 10.5 multiple minus $4.3B YE-20 net debt minus $275M preferred divided by 78M units = $38.27/unit)
Even with a weak EBITDA miss ($700M) and a terrible 9x multiple, TGP is worth over $22/unit. An EV/EBITDA ratio of 9x is insulting for any industrial comp, GLOP trades in the mid-10s and even a single 2nd-tier LNG carrier with a charter gets dropped down for 9.1x EBITDA.
TGP is rapidly delevering, which drives considerable value to equity even if valuation multiples are held constant.
Source: Teekay LNG Partners, Q1-19 Earnings Presentation, Slide 9
What about DCF? TGP reported $0.69/DCF, which means they trade at a 5x current DCF ratio and roughly a 4x forward DCF multiple. These are unheard of multiples for a company of this quality. Even 10x fwd DCF would be fairly low, and that's over $30/unit for TGP.
Calculation for Mid-2020: ($0.75-$0.80 range of DCF for mid-2020 x 10 multiple = $30-$32/unit)
This level of coverage is unprecedented in the space, with 2019-2021 coverage at 96% on average for the three years.
Source: Teekay LNG Partners, Q1-19 Earnings Presentation, Slide 11
TGP only has 5 assets left to deliver, all of which are fully financed. The final vessel "Yakov Gakkel" is currently scheduled for 25 November 2019.
Source: Teekay LNG Partners, Q1-19 Earnings Presentation, Slide 4
(Lack of) Yield...
I believe there's only one reason TGP is in the $13s right now instead of clearing $25 and pushing towards $30: the dividend (or lack thereof). Unfortunately these markets are so distorted that a company like GLOP carries a valuation 1.5-2.0 turns higher despite being worse off at every turn (review GLOP's latest presentation here):
- Inferior Backlog: $1.2B for GLOP vs. $10B at TGP
- Inferior Assets: GLOP mostly TFDE & Steam vs. TGP >50% Ultramodern
- Lower Coverage: GLOP 1.13x vs. TGP 3.63x
I've spoken personally with multiple industry analysts about TGP. Most agree that the long-term returns are likely to be substantial. But they won't give it a price target of any reasonable respect. Why? Because without yield, they know the units just won't get there anytime soon.
Unfortunately they're likely right. But it speaks to the craziness of this market when major bank analysts capitulate that the proper way to value a company is to simply slap on an 8-10% yield.
The markets are so broken that TGP is unlikely to move past the mid-teens without one of the following things:
Major new investors join the space. Those who look beyond current dividend yield and understand proper valuation metrics.
Investors and traders begin to believe that TGP is going to pay out substantially higher amounts in the near-future.
The trade war related negative sentiment is keeping #1 from happening and TGP's uber-conservatism blocks #2 for at least another two years. The "$11.30 of equity value" shared above looks great from a finance perspective, but it's anathema to those hoping to trade around yield jumps.
Unfortunately we're sitting on what seems to be extreme value. But we just can't get there without yield. At least not yet...
Conclusion: ‘Fair Value Estimate’ of $25.00/unit
TGP produced the best results and forward guidance, arguably in the entire 14-year duration of the company. If we use forward DCF or forward EV/EBITDA, even a target of $25.00 is fairly insulting; however, we’re talking about a stock in the $13s as this report is published… Here’s a review of TGP since inception, just to illustrate the hefty dislocation here:
Source: Google Finance, TGP Max Quote, annotations added
Where does my $25/unit target come from?
I believe TGP is fairly valued at a minimum of 10x EV/EBITDA; however, they also have a GP/IDR overhang to deal with. If TGP exchanges units with TK in a proportionate fashion to future DCF, I expect an exchange of close to 20% pro forma units. This would result in about 19.6M new units at current levels.
TGP would then have about 98.2M units in 2020 (78.6 / 80%). At $700-$725M EBITDA, $4.3B net debt, and $275M preferred equity, on a 10x multiple to EBITDA, TGP would be worth between $24.70 and $27.25.
Applying a multiple of 9.5x to a multiple of 10.5x on these same EBITDA ranges results in a wider valuation potential of between $21.13-$30.93.
Teekay Corporation: A Superior Angle?
Stay tuned for more updates on Teekay Corporation (TK) and how they are likely to produce a significant return once the TGP GP/IDR relationship is resolved. We've already demonstrated how TGP is worth between $21 and $31 next year after conversion. Keep in mind that in that scenario, TK would own nearly 45M units, an asset worth between $900M and $1.4B.
Much more coverage and updates coming soon- including live from New York City at Marine Money, June 17-19.
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Disclosure: I am/we are long TK, TGP. 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.
Additional disclosure: I may add more to TK or TGP at any time.