Teekay: Downgrading On Substantially Decreased Discount To Net Asset Value (NYSE:TK)

Be aware:

I’ve lined Teekay Company (NYSE:TK) beforehand, so traders ought to view this as an replace to my earlier articles on the corporate.

Earlier this month, Teekay Company (“Teekay”) reported robust second quarter numbers with outcomes boosted by the consolidation of Teekay Tankers (TNK). Whereas Teekay’s financial curiosity is under 30%, the corporate retains management of Teekay Tankers through supervoting Class B shares.

In Q2, Teekay Tankers contributed 93.7% of consolidated revenues as disclosed within the firm’s quarterly report on type 6-Ok :

As well as, the consolidated entity’s whole revenue was derived from Teekay Tankers as Teekay Company’s small marine companies enterprise was working at a loss:

In the course of the quarter, Teekay utilized $4.8 million in money for the acquisition of extra shares in Teekay Tankers. In mixture, the corporate bought 132,479 Class A standard shares at a median worth of $35.95 which has turned out to be an excellent funding thus far.

As of June 30, the corporate owned 5,168,785 Class A standard shares and 4,625,997 Class B widespread shares of Teekay Tankers, representing a 28.8% financial curiosity and nearly all of its voting energy.

As well as, Teekay continued to repurchase its personal widespread shares with excellent shares diminished by shut to five% on a quarter-over-quarter foundation:

At quarter finish, Teekay’s complete remaining share repurchase authorization was $26.7 million.

Throughout Q2, the corporate acquired $12.1 million in money dividends from Teekay Tankers.

Teekay ended the quarter with $272.4 million in money, money equivalents and short-term investments, that are comprised of financial institution deposits and short-term debt securities issued by the US authorities.

Regardless of shares buying and selling close to multi-year highs, they’re nonetheless altering arms at a reduction to internet asset worth (“NAV”):

That mentioned, the regular share worth enhance has resulted within the low cost narrowing fairly meaningfully from roughly 20% on the time of my final article in Might to 11% as of at the moment.

Given this subject, I might count on Q3 share repurchases to be moderately muted, notably given the truth that Teekay Tankers abstained from declaring one other beneficiant particular dividend for Q2.

Whereas seasonally decrease, the crude tanker constitution price setting continues to be robust as very a lot evidenced by the every day common time constitution equal (“TCE”) charges secured by Teekay Tankers quarter-to-date:

Nonetheless, on the latest convention name, Teekay Tankers’ administration made clear that there will not be any near-term dividend will increase:

We introduced simply final quarter, a change to our capital allocation coverage of $0.25 per quarter. I do not suppose you are going to see a change to that within the close to time period, one thing that we proceed to consider, however I would not count on to see a change to that within the close to time period.

As , we have determined that we’ll use particular dividends because the avenue for returning further capital to shareholders and/or utilizing the share buyback program, which we introduced final quarter. However that is one thing that we’ll take a look at on a extra periodic foundation, not one thing that we’ll be doing on a quarter-to-quarter foundation. So I feel we’ll most likely wait to see how the subsequent few quarters unfold after which make a name when it comes to what we wish to do on that facet of issues.

Whereas Teekay Tankers ought to proceed to do very properly within the present constitution price setting, I take into account the corporate’s hesitant method to dividends as considerably disappointing for Teekay Company’s shareholders.

Over the previous 4 quarters, Teekay Tankers has generated a whopping $17.62 per share in free money stream. As well as, the corporate expects to finish the third quarter in a stable internet money place:

Ought to the tanker constitution price setting stay robust going into 2024, I would not be shocked to see Teekay Tankers declaring one other beneficiant particular dividend alongside its This autumn and full-year 2023 report subsequent yr.

That mentioned, with the narrowed low cost to internet asset worth possible leading to decrease buyback exercise this quarter and restricted near-term prospects for elevated payouts from Teekay Tankers, I’m downgrading Teekay Company’s shares from “Purchase” to “Maintain“.

Draw back Dangers:

With the inventory worth closely correlated to the efficiency of Teekay Tankers, traders in Teekay Company could be properly served to maintain an in depth eye on the crude tanker markets.

As well as, the corporate has made quite a lot of less-than-stellar funding selections prior to now. A big-scale funding in a perceived speculative new enterprise alternative is more likely to be met with heightened scrutiny by market members.

Upside Dangers:

On the flip facet, an prolonged interval of elevated tanker constitution charges would possible end in Teekay Tankers and Teekay Company’s shares reaching new multi-year highs.

Backside Line:

Whereas Teekay Company’s personal enterprise stays nothing to jot down residence about, the consolidation of Teekay Tankers is boosting reported outcomes considerably.

Since my improve to “Purchase” eleven months in the past, Teekay Company’s inventory worth has appreciated by greater than 75%.

Regardless of ongoing tanker market energy, I’m downgrading shares from “Purchase” to “Maintain” primarily based on my expectations for decrease buyback exercise and Teekay Tankers’ quarterly dividend to stay at subdued ranges for not less than the rest of the yr.