After the Teekay Dividend Cut…Now What?

Wow. $TK just dropped a bomb with the dividend cut. Stock down ~60%. Underlying MLPs “pulled a $KMI” by opting to self finance.

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 09:35 AM

To really illustrate how bad it is in MLP land, $TK cut its dividend by 90% and still has a relatively high yield by today’s standards, 2.8%

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 09:54 AM

I realize that all of $TK‘s numbers are in flux given that its income from $TOO and $TGP are getting slashed, but consider…

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 01:44 PM

$TK tangible book value per share = $8.49. That means that at current prices TK is trading at a 20% discount to tangible book.

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 01:46 PM

Yes, high debt, etc. But the cash flows of its underlying MLPs are stable and growing. Chance of financial distress post dividend minimal.

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 01:48 PM

Bottom line, $TK should be pretty “riskless” to own at today’s price.

— Charles Sizemore (@CharlesSizemore) Dec. 17 at 01:50 PM

Teekay Corp (TK) cut its dividend by 90% this week after management also slashed the distributions of Teekay Offshore (TOO) and Teekay LNG (TGP). As a general partner with incentive distribution rights, TK gets the vast majority of its cash flow from the distributions paid by its MLPs. So a cut by the MLPs means a cut for TK.

Per the company:

“Although it is painful in the short-term to have to temporarily reduce Teekay Corporation’s dividend, management and our Board of Directors believe Teekay and its shareholders will achieve greater long-term value creation by focusing on enhancing the value of our ownership interests in Teekay Offshore and Teekay LNG and being in a better position to support their continued growth and distributable cash flow generation.”

Mr. Evensen added, “The underlying businesses of our two master limited partnerships remain strong, in stark contrast to the current weakness in the oil price and energy capital markets. Cash flows generated by both Teekay Offshore and Teekay LNG, which largely underpin Teekay Corporation’s dividend payment, remain stable and growing, supported by large and well-diversified portfolios of fee-based contracts with blue-chip counterparties. However, Teekay Offshore and Teekay LNG require capital to fund their growth and there is currently a dislocation in the capital markets relative to the underlying stability of our MLPs’ businesses. As a result, their cost of equity has increased to the point where it is currently not an economically attractive source of growth capital.”

It’s easy to forget that as recently as June, Teekay raised its dividend by nearly 75%. What went so wrong here, and what do you do if you currently own TK?

It all comes down to access to credit. With MLP prices down across the board, raising capital via equity issue is prohibitively expensive. But with the debt markets — and particularly the junk bond market — in major distress right now, they are worried about getting locked out of the debt markets too. So they are “self funding” by slashing their dividends.

This is essentially where we were in 2008, though it should be noted that the underlying assets here really are of high quality and stability. Of course, in a liquidity crisis, none of that matters.

So, what do you do today if you happened to own TK at the time of its blow up?

It’s currently trading at less than 80% of tangible book value. More pain might still be coming down the pipeline if you see even greater liquidation by hedge funds and closed-end funds. But selling at this price really doesn’t make sense. It might be a very long time before TK sees new all-time highs. As in, it might literally be a decade. Investors, once burned, don’t often return to a stock. But I do expect TK to at least trade above its tangible net asset value. Right now, the stock is quite literally worth more dead than alive. I would expect a 20%-30% recover fairly quickly. After that, it gets a little more uncertain.

But I would hold out for a sale price at $10.00 or higher. We’ll see what the market gives us.

Disclosure: Long TK

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