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Pruning Of The Teekay Family Tree Could Bear Fruit


The Teekay group of public shipping companies has been engaged in a multi-year effort to focus more on oil and natural gas transport and less on financial engineering. Those efforts appear to be paying off.

On May 23, Teekay Corporation (NYSE: TK), the parent holding company, reported a net loss of $84.3 million in the first quarter of 2019, compared to a loss of $20.6 million in the same period the year before. However, the most recent period included a significant write-down and other non-cash losses. Adjusted EBITDA was $237 million, up 41 percent year-on-year.

Teekay Tankers (NYSE: TNK) posted net income of $12.4 million in the latest quarter, compared to a loss of $19.2 million in the first quarter of 2018. Rates obtained by its Suezmax tankers (which each carry about one million barrels of crude oil) averaged $23,568 per day, nearly double the average a year ago.

Teekay LNG (NYSE: TGP) reported net income in the most recent period of $21.6 million, up from a loss of $6.9 million in the first quarter of 2018. The improvement was driven by the delivery of several newbuildings and the start-up of various long-term contracts at higher rates.

The overall scope of the Teekay group of companies continues to narrow. In the mid-2000s, then chief executive officer Peter Evensen built it out into a complex, multi-faceted family of entities under the premise that the whole was greater than the sum of its parts, and that financial engineering paid off via lower capital costs.

Teekay Corporation spun off its first ‘daughter' in the U.S. public market, the master limited partnership (MLP) Teekay LNG, in 2005. The second, the MLP Teekay Offshore, made its NYSE debut in 2006. The third – a C-Corp, not an MLP – Teekay Tankers, was listed on the NYSE in 2007.

Yet another entity, a ‘granddaughter,' Tanker Investments Ltd (TIL), went public in 2014 in the Oslo stock market. TIL was sponsored by Teekay Tankers; while Teekay Tankers focused on overall returns including charter revenues, TIL was specifically designed to focus on asset plays – buying tankers low and selling them high.

The listing of TIL marked the peak level of complexity for the Teekay group. Some analysts during that era questioned whether it had actually become too complex for investors to fully understand and value. Then came a series of events that put pressure on the Teekay companies and ultimately led to a change in direction.

The U.S. shale oil boom, which allowed crude oil to be produced much more cheaply than offshore, combined with the plunge in global crude oil pricing in 2014, spurred crippling losses across the offshore sector. Teekay Offshore was hit.

The price plunge of crude oil was also highly negative for the MLP sector, which is dominated by pipeline companies. Shipping MLPs, including Teekay LNG and Teekay Offshore, were caught in the crossfire. The whole rationale  of having an MLP is to obtain a lower cost of capital through follow-on offerings of partnership units; the window for those offerings largely closed.

Then came the plunge in tanker charter rates starting in 2016, with Wall Street investors fleeting the sector even earlier, in late 2015 – a negative for Teekay Tankers and TIL.

Evensen retired from his post at Teekay Corporation in January 2017. Changes came quickly thereafter. The group reversed course on TIL and announced in March 2017 that Teekay Tankers would buy the company; the consolidation transaction closed in November 2017.

In July 2017, Teekay Offshore confirmed that a major investment had been made by Canadian fund Brookfield Business Partners, after which Teekay Corporation's ownership in Teekay Offshore fell to 14 percent and Brookfield owned 60 percent.

Earlier this year, Teekay Corporation sold all of its remaining interests in Teekay Offshore to Brookfield. On May 20, Brookfield made an offer for all remaining outstanding shares of Teekay Offshore that it did not already own, implying that the company will be taken private.

The sales of TIL and Teekay Offshore have enhanced the group's simplicity. As Teekay Corporation chief executive officer Kenneth Hvid explained in the new earnings release, "The divestment of our remaining interests in Teekay Offshore was an important milestone in our evolution and is aligned with Teekay's strategy to simplify and focus on our core gas and tanker businesses."

Image sourced from Pixabay

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