Follow Up to “After the Teekay Dividend Cut”

Teekay dividend cut

It’s been about a week and a half since Teekay (TK) slashed its dividend to the bone and the stock price imploded (see “After the Teekay Dividend Cut…Now What?“).

In the aftermath, I recommended holding on to the shares. At the lows for the day, TK was trading at 80% of tangible book value and at about half of accounting book value. This was a company that, as recently as June, was confident enough to raise its dividend by 75%.

The stock price blow up had nothing to do with Teekay’s operations, which are fine. And it really had very little to do with energy prices for that matter. It had everything to do with the health of the capital markets. Teekay — or more accurately its underlying MLPs (TGP) and (TOO) — legitimately feared that, despite its consistent cashflows backed by long-term contracts, it would be locked out of the capital markets. It effectively already had been locked out of the equity market by the collapsing stock price (issuing new shares at current prices would be prohibitively dilutive to existing shareholders). And with the bond markets looking shaky, counting on the good graces of the bond market was a risk that management wasn’t willing to take.

I recommended holding on to any shares of TK until the price recovered to at least $10 per share. Well, we’re there…so now what?

I’m holding on to my shares for now. I expect the entire MLP sector to enjoy a major reflation in the first half of 2016. With the overall market looking pricey and with growth prospects looking pretty grim, I expect value hunting to be the order of the day. And after the beating that the MLP space has taken in 2015, this is one of the few pockets of value out there.

So…I recommend holding on to TK for a while. It may be years…or even a decade…before we see $50 per share again. But I think we may see $15 to $20 within the next year.

Disclosures: Long TK

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