Teekay Corporation - Surprise Sale Of Teekay LNG Partners Likely Prelude To Strategic Reboot
Summary
- Discussing surprise sale of Teekay LNG Partners to private equity firm Stonepeak.
- Estimated sales proceeds of almost $640 million will enable the company to redeem $250 million in high-yield debt well ahead of maturity.
- Updating net asset value estimates. Pro forma net cash position calculates to $332 million.
- Management's statement in the press release hints to upcoming changes in the company's business strategy. A push into renewable energy might be in the cards.
- Uncertainty regarding the company's future strategic direction has caused the discount to (pro forma) NAV to widen. Speculative investors might consider using this opportunity to scale into the shares but should remain wary of the stock's correlation to oil prices.
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Note: I have covered Teekay Corporation (NYSE:TK) previously, so investors should view this as an update to my earlier articles on the company.
On Monday, Teekay Corporation ("Teekay") surprisingly announced the sale of its subsidiary and most valuable asset Teekay LNG Partners (NYSE:TGP) or "Teekay LNG" to private equity firm Stonepeak in a transaction valued at $6.2 billion including consolidated and proportionate joint venture net debt, and $1.5 billion in common unit equity value.
Common equityholders will receive $17.00 in cash per unit while Teekay LNG's preferred units (TGP.PA and TGP.PB) are expected to remain outstanding and continue to trade on the New York Stock Exchange. While the company will be able to call for redemption of the Series A Preferred units this does not seem to be the case for the Series B units with redemption only possible after October 14, 2027.
The transaction is expected to close by the end of 2021. With Teekay owning approximately 41% of Teekay LNG's outstanding common units, approval appears to be a mere formality.
As Teekay owns an aggregate of 37.6 million limited and general partner units, the company stands to receive close to $640 million in cash proceeds from the transaction.
I would expect Teekay to use approximately $250 million to redeem its 9.25% 2022 senior secured notes shortly after the close of the transaction. The company also faces a $112.2 million convertible bond maturity on January 15, 2023.
As a result of the Teekay LNG sale, Teekay will no longer receive distributions from the subsidiary which will result in an approximately $43.1 million cash flow hit next year.
On the flipside, the likely redemption of the senior secured notes would save approximately $22.5 million in annual interest payments.
After the close of the transaction, Teekay's main asset will be its 28.6% ownership in Teekay Tankers (TNK), currently valued at $137.7 million.
The company continues to own the Hummingbird Spirit FPSO but is looking to wind down this segment after legacy units Petrojarl Foinaven and Petrojarl Banff have already been decommissioned. The current charter contract for the Hummingbird Spirit is scheduled to end in March 2023.
Going forward, I would expect the company's quarterly cash usage to be between $2 and $3 million.
To be perfectly honest, I suspect the November 2022 senior secured notes maturity to have been the main driver behind the Teekay LNG sale as the company would have been required to reclassify the debt from long-term to current in its upcoming FY2021 annual report and a refinancing at materially improved terms rather unlikely.
Pro forma for the sales proceeds from the Teekay LNG stake and the assumed senior secured notes redemption, the company's net asset value ("NAV") calculates as follows:
Sources: Company Press Releases, Yahoo Finance, Fintel.io
Currently, shares are trading at an almost 20% discount to pro forma net asset value which is likely caused by the increased uncertainty regarding Teekay's future strategic direction.
Management's vague statement in Monday's press release likely didn't help things:
This Transaction also provides Teekay with greater financial flexibility to leverage its existing operating franchise and industry-leading capabilities to pursue attractive investment opportunities in both the shipping sector and potentially in new and adjacent markets, which we expect to be dynamic as the world pushes for greater energy diversification.
At least to me, this reads like the company might be considering a push into renewable energy rather than declaring a generous special dividend or even pursuing an orderly liquidation of its remaining assets and subsequently distributing the proceeds to common shareholders.
Personally, I do not expect the company to increase its stake in Teekay Tankers despite the subsidiary's depressed share price and charter rates about to recover from recent lows given the poor performance of this investment over the past decade and with long-term oil demand becoming increasingly uncertain.
Bottom Line:
The surprise sale of Teekay LNG to Stonepeak will help the company address close to $250 million in high-yield debt well ahead of maturity and provide Teekay with ample cash to pursue new investments.
At least at this point, a special dividend or potential liquidation does not appear to be in the cards.
The increased uncertainty regarding the future direction of the company has widened the discount to NAV with shares currently changing hands at almost 20% below their pro forma net asset value.
Speculative investors might consider using this opportunity to scale into the shares but should remain wary of the stock's correlation to oil prices.
This article was written by
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Comments (101)
My understanding is that Stonepeak can do whatever they want with the Preferreds. Stop payments and even delist. The question is - what penalty is there to Stonepeak if they do that ? Will it be harder to borrow money in the Capital markets ? All knowledegable comments welcome Thanks
push into renewable energy. How did that work for Eneti?I'd like to see a double down into tankers TNK or a stake in TORM
Pondering whether to just give up & move on with what is left.
Perhaps this is just another DRYS?
My other (current) major mistake is GLNG - down 50%.
Shipping is not for me!
I think this deal will be challenged legally given the history here of insider dealing to the detriment of the public holders of TGP. Also, how do you expect them to close by year end? Will take several weeks/month to put together the proxy, then a month or more at SEC and then time to call a shareholder vote, seems like 4 months at minimum. Also I see StonePeak has bought a big position in NFE - I bet they have a plan here. The price they are paying for TGP is way to low especially given what TGP management said about future prospects a year ago when they issued 7.5 Million shares to their parent for the IDR diluting us - did we get the future dividends that they promised on approving this? NO, TK gets $180 million more in consideration to the detriment of the public share holders of TGP buy doing that deal and selling now. Since then the prospect for TGP have improved substantially. TK may need the money but i do not, I want to keep this high dividend stock especially since dividends growing and debt declining - where can you buy a $6 Billion business, have financing in place and continue to dividend out money at 7% plus rates on your investment?
Stay tuned, this story is just beginning.
1. Check my wallet.
2. Sell any common AND PREFERRED holdings in subject MLP:After watching the saga of Teekay offshore preferreds (whose dividends were indefinitely postponed a few months ago to allow higher interest payments to Brookfield:
seekingalpha.com/...and the near elimination of distributions for HMLP common and the follow-on effect on the HMLP class A preferreds:
seekingalpha.com/...its clear that MLP's, to the extent they are investable at all for small, retail holders, must be avoided like the radioactive garbage they quickly become once minimally scrupulous private equity gets involved.This applies to TGP preferred stock 100%.
