Teekay And Its Many Subsidiaries

Includes: TGP, TK, TNK, TOO
by: Zvi Bar

Teekay Corporation (NYSE:TK), like many companies involved in maritime shipping, has had a difficult time since the global economy hit the skids in 2008. Teekay just reported its results for the third-quarter of 2012, as did as its publicly traded subsidiaries. Teekay Corporation reported an adjusted net loss of $20 million or $0.29 per share (excluding specific items which increased GAAP net loss by $0.3 million) for the third quarter of 2012. Additionally, the company commented that it agreed to sell the Voyageur Spirit FPSO to Teekay Offshore Partners (NYSE:TOO) for $540 million, with the transaction expected to be completed this December.

Earlier this year, Moody's reduced its outlook on Teekay Corporation from stable to negative, based upon concerns that management will continue to use equity capital to fund investments and/or that TK will sell assets to one of the company's publicly traded spun-off subsidiaries, such as Teekay Offshore Partners, Teekay LNG Partners (NYSE:TGP) and Teekay Tankers Ltd. (NYSE:TNK). This pending transaction shows that these concerns over asset sales to subs were legitimate.

Many shippers expanded their fleet prior to the recent collapse in real estate production. Shipping volumes have since declined and then stabilized, leaving the industry with its present overcapacity and concerns over future demand. Moreover, most of this overcapacity was leveraged, leaving many competitors with problematic levels of debt and aging, largely unused fleets. This has made things difficult for Teekay and its subsidiaries, as well as their competitors.

As for its subsidiaries, performance has been mixed. Teekay LNG is the best performing public Teekay subsidiary in 2012, appreciating by about 9.5 percent and providing an annualized distribution of about 7.2 percent. On October 12, Teekay LNG declared a cash distribution of $0.675 per unit for Q3. This is the third consecutive quarter at that rate, after increasing the distribution from its former rate of $0.63.

Teekay LNG's report noted distributable cash flow of $57.8 million, compared to $43.7 million in the same quarter last year. The increase in Teekay LNG's cashflow was primarily due to the acquisitions of a Multigas carrier delivered in October 2011, a 33 percent interest in four liquefied natural gas carriers delivered between August 2011 and January 2012, one liquefied petroleum gas carrier delivered in September 2011, and a 52 percent interest in six LNG carriers acquired in February 2012.

So long as natural gas demand continues to grow, and also so long as there are significant differences in natural gas pricing among different geographic locations, this added capacity should be a good thing. Of course, as was the case for the broader shipping industry several years ago, adding capacity can be very dangerous if future demand growth does not occur.

Teekay Offshore operates the world's largest fleet of shuttle tanker ships that transport oil from offshore rigs to land. That fleet will grow by one once its parent company completes the $540 million sale of the Voyageur Spirit FPSO to it. Teekay Offshore shares are essentially flat so far through 2012, but have declined by about 9.3 percent over the last six months and seven percent over the last three months. For the third-quarter of 2012, Teekay Offshore reported it generated distributable cash flow of $38.6 million during the quarter, compared to $52.1 million last year.

Teekay Offshore noted that its "cash flow contribution from our conventional tanker segment has been declining due to the expiration and cancellation of time-charters on three of the Partnership's conventional tankers in recent quarters." Despite those declines in recent quarters, on October 12, TOO declared a cash distribution of $0.5125, which was the third consecutive quarter at that rate, after increasing is distribution from $0.50.

Teekay Tankers owns and operates 11 medium-size oil tanker vessels. Teekay Tankers is the worst performing of the public Teekay subsidiaries in 2012, having declined by about 13.3 percent since the start of the year and by over 50 percent since the start of April. During the third quarter of 2012, TNK reported it generated $9.7 million or $0.12 per share in cash available for distribution, compared to $11.8 million or $0.15 per share in the second quarter of 2012.

Teekay Tankers is slightly different than the other two discussed partnerships, in that it is not a true limited partnership. Teekay Corporation retained a controlling interest, and TNK also pays out a dividend rather than a distribution. On November 7, Teekay Tankers declared a dividend of $0.02 per share, which is an 81.8% cut from the $0.11 it paid out last quarter. The market likely expected much of this substantial reduction, though its 10-20 percent decline in response to Q3 earnings and the dividend announcement indicates that many investors were presuming a less significant cut.

Given the present concerns about a potential continuing market correction and the extreme sensitivity the shipping of energy commodities has to global demand, all Teekay businesses have the potential to decline from their present rates. Based on the recent performance rates, it would appear that Teekay LNG continues to be the most consistent and growing Teekay subsidiary, and that Teekay Tankers will continue to be the most volatile. Still, with TNK's major dividend cut now being disclosed, much of its bad news appears behind it. With a short position in TNK of over 15 percent, compared to TOO's 1.2 percent and TGP's 1.8 percent short interests, it may still be too early to jump on into TNK.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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