Load Up On Over 9% YTM from Teekay Corporation, Bonds Mature January 2020

  • Teekay Tankers nearly doubled its quarterly revenues from the prior year period.
  • Teekay Corporation recorded adjusted cash flow from vessel operations of $19.8 million as compared to $1.2 million a year earlier.
  • Teekay LNG revenues increased to $123.3 million as compared to $104.3 million a year earlier.

This week, Durig Capital takes a look at a leading marine transportation company. Teekay Corporation provides marine transportation, storage, and vessel leasing for the oil and natural gas industry. The company’s third quarter saw increases in its subsidiaries revenues over second quarter. Here are some highlights from its third quarter results.

 

  • Teekay Tankers nearly doubled its quarterly revenues from the prior year period.

  • Teekay Corporation recorded adjusted cash flow from vessel operations of $19.8 million as compared to $1.2 million a year earlier.

  • Teekay LNG revenues increased to $123.3 million as compared to $104.3 million a year earlier.


Teekay Corporation has seen its revenues increase in the past few quarters due to increased demand for its services. And it is predicting continued increases based on spot rates for LNG shipping and tanker rates. The company’s 2020 bonds are currently trading at a slight discount giving them a yield-to-maturity of more than 9%. Based on its solid past few quarters, these 2020 bonds look to be an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown below.

 


Teekay Third Quarter Results 

Teekay Corporation posted excellent quarterly results for its third quarter (three months ending September 30, 2018). As the parent company over Teekay LNG, Teekay Tankers and an equity stake in Teekay Offshore, both the parent company and its subsidiaries registered wins in the company’s most recent quarterly results.

 

  • Teekay Corporation recorded Adjusted Cash Flow from Vessel Operations (including distributions and dividends paid from Teekay LNG, Teekay Tankers, and Teekay Offshore) of $19.8 million, as compared to $1.2 million in the prior year period.

  • Teekay LNG revenues increased to $123.3 million in the third quarter, versus $104.3 million in the prior year period.

  • Teekay LNG took delivery of three new LNG carriers and a floating storage unit.  In addition, Teekay LNG is scheduled to receive an additional seven LNG carriers through 2019. The current spot LNG shipping market continues to strengthen to new multi-year highs.

  • Teekay Tankers third quarter revenues totaled $175.9 million, nearly doubling from the prior year period of $91.2 million.

  • Teekay Corporation Consolidated revenues for the third quarter registered $416.6 million, showing consecutive growth from second quarter’s revenues of $405.6 million.


Other highlights from the third quarter included Teekay LNG’s decision to change its tax status from a partnership to a corporation, which should provide the company with additional options for raising capital as well as refinancing debt. Also, Teekay LNG intends to increase its quarterly cash distributions on common units by 36% in 2019 as part of a balanced capital allocation strategy. In addition to these points, during the third quarter, Teekay Corporation repurchased $45.8 million of these 8.5% notes.  

About Teekay Industries
 

Teekay Corporation operates in the marine midstream space through its ownership of the general partner and a portion of the outstanding limited partner interests in Teekay LNG Partners L.P. (NYSE:TGP) and an interest in the general partner and a portion of the outstanding limited partner interests in Teekay Offshore Partners L.P. (NYSE:TOO). The general partners own all of the outstanding incentive distribution rights of these entities. In addition, Teekay has a controlling ownership interest in Teekay Tankers Ltd. (NYSE:TNK) and directly owns a fleet of vessels. The combined Teekay entities operate total assets under management of approximately $17 billion, comprised of approximately 220 liquefied gas, offshore, and conventional tanker assets. With offices in 14 countries and approximately 8,300 seagoing and shore-based employees, Teekay provides a comprehensive set of marine services to the world’s leading oil and gas companies.
 

Prospects for Teekay LNG and Teekay Tankers
 

Teekay LNG Partners (TGP), one of Teekay Corporation’s entities, appears on target for a fantastic 2019. With three new LNG carriers delivered in the last half of 2018 and another seven on way in 2019, the company stands to benefit from the healthy spot shipping rates for LNG carriers. In fact, Teekay LNG expects to grow annual CVFO (Cash Flow from Vessel Operations) by $150 million with the delivery of these additional carriers. This anticipated increase is expected to naturally de-lever the company’s balance sheet. TGP has already begun to show increases in its operational cash flow from its most recent quarterly results. In its third quarter 2018, the company had CVFO of $132.6 million, adjusted net income of $19.5 million or $0.16 per common unit, representing increases of 15%, 44%, and 78% respectively over the second quarter 2018.
 

Teekay Tankers (TNK) also posted a solid Q3 and is looking at excellent prospects in 2019. TNK reported third quarter total CVFO of $28 million, an increase of $17 million over Q2. Crude tanker rates strengthened during Q3 and into Q4. If spot tanker rates stay at the levels from Q4, TNK estimated free cash flow per share would increase to over $1 per share over the next 12 months.

 

Growth in LNG Exports and LNG Demand
 

Over the past few years, the U.S. has vastly increased its exports of liquefied natural gas (LNG).  In 2017, LNG exports from the U.S. quadrupled to 1.94 billion cubic feet per day (bcf /d) from 0.5 bcf/d in 2016. According to S&P Global Platt, it expects that total exports in 2018 will have topped that amount handily. The country’s first major LNG export terminal, Sabine Pass on the Texas / Louisiana border was the country’s only LNG export facility until April 2018 when the Cove Point LNG Terminal opened in Maryland. On the heels of that facility’s opening, there are at least four more facilities that will open in the next few years within the U.S. There is also an additional, mega-LNG port facility underway in Canada worth more than $30 billion led by Royal Dutch Shell. An increasing number of export terminals translates to additional need for LNG carriers to transport LNG to its ultimate destination, which could benefit Teekay Corporation.
 

Driving this growth in U.S. exports is global LNG demand. LNG is quickly becoming the fuel of choice for many industrial nations. LNG trade increased by 22% between 2014 and 2017 and is predicted to increase an additional 21% by 2020. In 2005, only 15 countries imported LNG. Now that number has more than tripled. Most of the demand increase is coming from Asian countries like China and Japan.  In fact, China has plans to increase its share of natural gas in its energy mix from a targeted 10% by 2020 to 15% by 2030. China’s consumption and production of natural gas have both increased, but a supply gap has continued to increase since 2009, necessitating the country’s increased imports.
 

Interest Coverage and Liquidity
 

In its most recent quarter, Teekay Corporation had operating income (without the effect of non-cash depreciation) of $18.4 million and interest expense of $15.0 million for an interest coverage ratio of 1.2x. In terms of liquidity, Teekay Corporation had total liquidity as of September 30, 2018 of $389.9 million (consisting of $191.1 million of cash and $198.8 million of undrawn credit facility).
 

Risks
 

The risk to bondholders is whether Teekay Corporation can continue to grow its revenues. The company receives dividends from each of its subsidiaries each quarter and its subsidiaries businesses are beginning to see growth due in large part to increased spot rates in LNG shipping and tanker rates. In addition, Vince Lok, Teekay’s CFO, indicated in the last earnings call that they expect “consolidated results to be stronger in the fourth quarter compared to the third quarter due to higher forecasted earnings in each of our daughter entities.” With results seemingly improving, the over 9% yield to maturity on the company’s 2020 bonds appears to outweigh the risks identified.

 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
 


Summary and Conclusion 

Teekay Corporation is riding the wave of increased commodity pricing, increased spot pricing for LNG shipping and tanker rates, as well as increased global demand for LNG. The company is taking advantage of these increases by putting more carriers and tankers in the water to meet the demand. The company expects Q4 results to increase over Q3, which should add up to a successful year for the oil and gas transport company. With a very competitive yield to maturity of over 9%, the company’s 2020 bonds represent an excellent opportunity for diversification and as such these bonds are an ideal candidate for Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown above.
 

Issuer: Teekay Corporation

Ticker: NYSE:TK

Coupon: 8.500%

Ratings: Caa1 / B+

Maturity: 01/15/2020

Pays:  Semi-annually

Price: ~99.4

Yield to Maturity: ~9.15%

 

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Disclosure: Durig Capital and certain clients may hold positions in Teekay’s 2020 bonds.
 

We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful.  Our main priority is to provide the best opportunities for our clients.  Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
 

Disclaimer: Please note that all yield and price indications are shown from the time of our research.  Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients.
 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
 

Disclaimer: The high yield strategies presented in this review by Durig Capital may not be suitable for all investors.  This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.

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