OGIB BULLETIN #208 - February 3rd, 2017 TEEKAY LNG ... · Teekay was founded initially in 1973 by...
Transcript of OGIB BULLETIN #208 - February 3rd, 2017 TEEKAY LNG ... · Teekay was founded initially in 1973 by...
OGIB BULLETIN #208 - February 3rd, 2017 TEEKAY LNG PARTNERS; TGP-NYSE COMPANY ANALYSIS
In December of 2015 Teekay Corporation gave unitholders of it and two of
its three daughter companies a nasty Christmas present.
Big, fat, dividend cuts ranging from 80-90%. Investors reacted as you
might expect….they sold the Teekay family hard.
The decision wasn’t popular, but it doesn’t mean that it was wrong. With
MLP valuations across the board very weak through 2015, Teekay decided
it was better to cut the dividend and use cash for growth spending rather
than have to issue new shares/units.
Now with funding for all future spending pretty much lined up and $12.2
billion of future revenue secured with contacts Teekay LNG Partners is
poised to increase its distribution.
The increase is likely to be very big; it’s just a question of timing and the
pace of increase. Teekay generated $0.95 of distributable cash in Q3 and
paid out only $0.14. I see units probably going to the high-$20’s in 18
months with the distribution payout increasing from $.56 per year to $2.80.
That would be a 15% yield on the current unit price. I like double digit
yields; I don’t see the point in owning a stock for yield unless it’s 10%
+. Otherwise, I just play it for capital gains.
QUICK FACTS (Include Jan 18, 2017 Equity Issuance)
Share Price: $18.65
Basic Shares Outstanding: 80.0 million
Market Cap: $1.49 billion
Net Debt: $1.90 billion
Enterprise Value (EV): $3.39 billion
Distributable Cash Per Share Generated Q3 2016: $0.95
Current Quarterly Distribution: $0.14
Current Yield: 3.0%
Estimated 2019 Distributable Cash Per Share: $2.80
Estimated 2019 Yield: 15.0%
http://teekay.com/investors/teekay-lng-partners-l-p/
POSITIVES
- Significant portion of fleet on long term charter contracts--a $12.2 billion
backlog for over 13 years.
- Massive dividend hikes likely coming
- Demand for LNG will be strong for a long time to come
- Large fleet gives leverage to any rise in LNG shipping rates
- No increase in LNG day rates needed for divvy to go back to $2.80/yr
NEGATIVES
- Huge amount of debt is the nature of this business
- Massive capital investment is tied up in these ships and better new
designs could render them obsolete (ie…breakthrough in fuel efficiency)
- Handful of ships coming off charter (fewer than most of the industry)
- Can’t control competitors overbuilding
BACKGROUND/PROPERTIES
Teekay was founded initially in 1973 by Torben Karlshoej whose initials
gave the company its name. Over the next forty years the company
expanded from being a small oil tanker operator to a global heavyweight in
shipping.
The initial Teekay has expanded into several new segments and has been
split into four distinct publicly traded companies. If you would like to read
the full history of how this business developed the company has a lengthy
back ground for you here.
Teekay today is comprised of:
Teekay Corporation (TK:NYSE) – Does not own any vessels, is an asset-
lite, pure play that has common/LP ownership in all three daughters, along
with GP value in two of them
Teekay Offshore Partners (TOO:NYSE) - MLP focused on offshore
projects; leader in harsh weather FPSOs and shuttle tankers
Teekay Partners (TNK:NYSE) – Regular corporation that owns and
operates conventional medium-size oil tanker vessels.
Teekay LNG Partners (TGP:NYSE) - MLP focused on natural gas
projects, one of the largest LNG carrier owners and operators on the
planet.
Teekay Corporation (the parent) is basically an asset manager. It manages
the operations of the three daughter companies and no longer has any
hard assets of its own.
We are interested in one of the daughter companies, Teekay LNG
Corporation which is an MLP.
First, a little background on why this opportunity exists.
On December 17, 2015 Teekay Corporation (the parent) had a business
call to advise the market of a major shift in strategy. Teekay announced
that it would be making a huge cut to distributions at two of the three
daughter companies and at the parent level as well.
The distribution cuts were severe:
-TGP – distribution cut 80% from 70 cents/quarter to 14 cents
-TOO – distribution 80% cut from 56 cents/quarter to 11 cents
-TK – dividend cut 90% from 55 cents/quarter to 5.5 cents at parent level
The first two entities are MLPs; TK is a regular corporation (which is why
the word distribution vs dividend is used).
As you can imagine, the news of 80-90% distribution cuts went over with
investors like a lead balloon.
That isn’t to say that cutting the distributions wasn’t the right decision.
The two daughter companies (including Teekay LNG) had a large dollar
amount committed to upcoming expansion related spending. With MLP
valuations in the dumps management decided that it would be much
smarter to use cash flow to fund that spending instead of issuing equity at
unfavorable prices or taking on even more debt.
The distribution cut at TPG saved $430 million that would have gone to
shareholders and instead directed it towards growth spending or balance
sheet strength.
Here is the company’s reasoning behind its change in distribution strategy
in its own words:
Our primary long-term business objective is to increase our cash available
for distribution.
However, we believe there is currently a dislocation in the energy and
master limited partnership capital markets relative to the stability of our
businesses.
Based on upcoming capital requirements for our committed growth projects
and scheduled debt repayment obligations, coupled with uncertainty
regarding how long it will take for these capital markets to normalize, we
believe it is in the best interests of our common unitholders to conserve
more of our internally generated cash flows to fund these projects and to
reduce debt levels.
As a result, we have temporarily reduced our quarterly distributions on our
common units and our near-term business strategy is primarily to focus on
funding and implementing existing growth projects and repaying or
refinancing scheduled debt obligations, rather than pursuing additional
growth projects.
Despite significant weakness in the global energy and capital markets, our
operating cash flows remain largely stable and growing, supported by a
large and well-diversified portfolio of fee-based contracts with high-quality
counterparties.
Teekay upset the equity holders whose long-term best interests the
company was protecting. Those shareholders in turn expressed their
unhappiness by driving the unit price down.
I underlined the word temporarily…..I believe that TPG was serious about
the fact that the distribution level would be reinstated.
The Market doesn’t really care.
That sets me up with an opportunity to own TPG in advance of those
distributions being reinstated once financing is in place for the required
future capital spending. Management took care of that the day I bought my
stock.
Teekay LNG Partners – The Business
Teekay LNG Partners is a publicly traded master limited partnership formed
by Teekay Corporation in 2004 as part of its strategy to expand its
operations in the LNG and LPG shipping sectors.
The company provides LNG (liquefied natural gas), LPG (liquefied
petroleum gas – butane/propane), and crude oil marine transportation
services.
This is an incredibly capital intensive business. The ships involved cost
big, big bucks and a lot of it all is financed with debt.
It is what it is folks. All of the companies in this business are highly
leveraged which is why share prices can be very volatile. These are not
widow and orphan stocks but if you buy them at the right time in the cycle
you can make a lot of money.
To counteract the risk imposed by the debt and by the fact that ship charter
rates can fluctuate dramatically over shore time periods TPG primarily
provides its services under long-term, fixed charter contracts with reliable
counterparties.
That eliminates a lot of the exposure to fluctuating charter rates, but you
can’t ever eliminate all of it.
The Fleet Of Ships
As of September 1, 2016, TGP’s fleet consisted of:
LNG Carriers
LNG carriers transport LNG internationally between liquefaction facilities
and import terminals.
After natural gas is transported by pipeline from production fields to a
liquefaction facility, it is super cooled to a temperature of approximately
negative 260 degrees Fahrenheit. This process reduces its volume to
approximately 1/600th of its volume in a gaseous state.
The reduced volume allows it to be stored & shipped over long distances
economically. This enables countries with limited natural gas reserves or
limited access to long-distance transmission pipelines to import natural gas.
LNG carriers include a sophisticated containment system that holds the
LNG and provides insulation to reduce the amount of LNG that boils off
naturally. The natural boil off is either used as fuel to power the engines on
the ship or it can be re-liquefied and put back into the tanks.
LNG is transported overseas in specially built tanks on double-hulled ships
to a receiving terminal, where it is offloaded and stored in insulated tanks.
In regasification facilities at the receiving terminal, the LNG is returned to its
gaseous state (or regasified) and then shipped by pipeline for distribution to
natural gas customers.
You probably knew all of that….but writing about it allowed me to use fancy
words such as gaseous and regasification.
The company has 50 of these LNG ships including one regasification unit
and 19 new builds. TGP doesn’t own 100% of these ships. Instead it owns
portions of subsidiaries that own the ships.
Here is the ownership split
-Seventeen are 99 to 100 percent owned
-Five are 69 to 70 percent owned
-Six are 52 percent owned
-Eight are 50 percent owned
-Four are 40 percent owned
-Four are 33 percent owned
-Two are 30 percent owned
-Two are 20 percent owned
-Two aren’t owned at all but are instead chartered
What a mess! It makes me glad that I’m not an accountant at that place…..
Of the $4.3 billion of assets on TGP’s balance sheet $3.8 billion relate to
the LNG business.
By not owning these ships jointly with other parties TGP spreads out its
capital expenditures across more ships and also widens the exposure it
has to various partners across the industry.
TGP’s ships are typically tied to specific liquefaction projects and are under
long-term contracts.
As at September 1, 2016, TPG’s LNG carriers had an average age of nine
years, compared to the global LNG carrier fleet average age of 11 years.
As of July 1, 2016 the weighted average remaining term on the charters of
these vessels was roughly 12 years. That won’t have changed much since
then.
At Sep 1, there were about 459 vessels in the global LNG fleet and 140
additional LNG carriers under construction or on order.
The existing and new build ships of TPG combined account for 9.2% of the
total global LNG shipping capacity.
LPG Multigas Carriers
LPG shipping involves the transportation of three main categories of cargo:
liquid petroleum gases, including propane, butane and ethane;
petrochemical gases including ethylene, propylene and butadiene; and
ammonia.
You saw how the LNG assets represent the vast majority of TGP, so the
LPG business is much smaller for them.
The two largest consumers of LPG are residential users and the
petrochemical industry. Residential users, particularly in developing regions
where electricity and gas pipelines are not developed, do not have fuel
switching alternatives and generally are not LPG price sensitive. The
petrochemical industry, however, has the ability to switch between LPG
and other feedstock fuels depending on price and availability of
alternatives.
TPG has 29 LPG/Multigas carriers which includes five new builds. These
are usually chartered on time-charters or spot voyage charters primarily
with international energy and fertilizer companies. The ownership split of
these vessels is:
-6 are 99% owned
-20 are 50% owned
-3 are chartered
As of September 1, 2016, TPG’s LPG carriers had an average age of about
nine years, compared to the global LPG carrier fleet average age of closer
to 15 years.
As of that date, the worldwide LPG tanker fleet was 1,395 vessels and 149
additional LPG vessels were on order. New LPG carriers generally have
an expected lifespan of approximately 30 to 35 years.
As of September 1, 2016, the TPG fleet including new builds represented
roughly 2.5% of the total global LPG/Multigas fleet capacity.
Conventional Tankers – TPG also has six conventional tankers
(consisting of five crude oil tankers and one product tanker) that operate
under short to medium-term charter contracts with international oil
companies.
Of the six conventional tankers, four are held through 100% owned
subsidiaries and two are chartered in by TPG.
As of September 1, 2016, our conventional tankers had an average age of
approximately 12 years, which is consistent with the average age for the
global conventional tanker fleet. New conventional tankers generally have
an expected lifespan of approximately 25 to 30 years, based on estimated
hull fatigue life.
As of July 1, 2016, the weighted average remaining term for the charters of
these vessels was approximately two years.
The New Builds
Through 2020 TGP will receive a lot of new ships which will drive revenues
higher. Through 2020 the company is scheduled to receive 15 LNG
vessels and 10 LPG vessels.
TGP has been a leader in developing new technologies for this
industry. TGP is credited with developing vessels with MEGI engines
which provide big fuel savings.
TGP actually took a bit of risk with these MEGI ships, breaking from policy
and ordering a bunch of ships without having long term charters
attached. The gamble has paid off as TGP has signed Shell on for all of
the unchartered MEGI vessels.
MEGI stands for “M-type, Electronically Controlled, Gas Injection”. These
are low emission ships that have the added benefit of using the boil-off
LNG to fuel the engines.
The boil-off gas accumulates during the shipping route due to changes in
pressure and temperature. By using the boil-off gas the gas injection
system only needs a small amount of marine oil fuel for ignition.
This is a big deal as it is estimated that 80 to 90 percent of the fuel used on
a voyage can come from this boil-off gas……huge fuel cost savings.
YAMAL LNG PROJECT
The Yamal peninsula in Northeastern Russia contains large reserves of
natural gas, and large scale developments of these gas fields are
underway. These gas fields are located in arctic conditions which lack the
infrastructure to transport these cargoes.
There are plans to build out pipelines to reach destinations in Eastern
Europe but the majority of these cargoes will need to be transported via
LNG carriers to destinations in Europe and Asia.
Through a joint venture with China LNG, TGP has ordered six LNG carriers
from Daewoo Shipbuilding & Marine Engineering (DSME) for $2.1 billion.
These vessels, ordered at DSME, will be equipped with duel fuel engines
and a new hull design with forward and reverse ice breaking capabilities.
The vessels are scheduled to be delivered starting in Q1/18 until Q1/20
where they will be employed on 25 year charters (plus extension options) to
Yamal Trade Pte Ltd.
The Yamal LNG Project is a joint venture between Novatek, Total, and
China National Petroleum Corporation (CNPC). This project will consist of
three LNG trains with a total expected capacity of 16.5 million tons of LNG
per year with scheduled start-up expected in 2018.
The LNG plant will be supplied mainly from the Yuzhno-Tambeyskoye gas
field
(proven reserves of 481.1 billion cubic meters) with the main export market
in China.
LNG will be shipped to Asia via the Northeast Passage.
The Future Of The LNG Shipping Market (Per TGP’s Recap)
Global LNG exports increased noticeably in the third quarter of 2016, with
new exports trains coming online in Australia, the USA, and Malaysia, and
production resuming at the Gorgon and Angola projects. In total, exports
have increased by 15 million tonnes in the first nine months of 2016
compared to the same time last year.
For 2016 as a whole, LNG trade is on track to increase by 20 to 25 million
tonnes compared to 2015, or 8% – 10%. This increase in LNG trade will be
roughly matched by an increase in the LNG fleet, which we expect to
increase by 8% – 10% by year-end. As a result, broker assessed short-
term charter rates for LNG vessels have remain relatively unchanged for
much of 2016.
LNG Charter Rates
However, as demonstrated by the increase in rates in the third quarter of
2016, fleet availability is becoming tighter. The number of vessels available
on the short-term market has fallen from approximately 30 vessels at the
start of 2016 to less than 20 vessels as of October 2016.
Outlook
After several years of the LNG fleet growing faster than the demand for
vessels, LNG trade is now increasing faster than fleet supply.
By the end of 2017, between 10 and 12 new LNG exports trains are
scheduled to come online in Australia, the USA, Russia, Malaysia and
West Africa. In total, LNG trade should increase by approximately 30
million tonnes next year, or close to 11%. In contrast, the LNG fleet should
increase by roughly 8% next year, leading to an increase in fleet utilization
over the course of 2017. In the longer-term, this trend will continue through
the end of the decade; the current order book for LNG vessels is equivalent
to approximately 31% of the fleet, whereas LNG trade expected to grow by
more than 40%.
FINANCES
Cash flow predictability is absolutely crucial with the debt that a company
like this takes on. The level of debt in this industry is very similar to a
heavily leveraged real estate deal.
The key difference being that rent attached to real estate is very steady
while day rates in the shipping industry are like riding a roller coaster.
Long-term fixed contracts are desirable. At the end of September, TGP
had contracts in place for $12.2 billion of revenue with a weighted average
contract duration of 13 years.
To give you an idea of how leveraged this industry is, consider that as I
reviewed the analyst reports on TGP the general perception was that this
was a moderately leveraged company.
Moderately leveraged for this business means that with some $2.2 billion
worth of debt versus about $400 million of cash against $300 million or so
of EBITDA in 2017.
The company now distributes $0.14 quarterly to unitholders, implying a
yield of 3.0%. As I mentioned earlier, the dividend was cut 80% in
December as management felt the selloff in the MLP space made its cost
of equity a lot more expensive than internally generated funds.
As TGP takes possession of new ships, and capital spending requirements
slow, the cash available for distribution will increase in a big way,
potentially back to $2.80 per share.
A big step forward was achieved on January 24, 2017 with the
arrangement of nearly $900 million of long term financing. The biggest
piece was a $685 million sale-leaseback transaction with ICBC Leasing for
four of the Partnership's MEGI LNG carrier new builds delivering in 2017
and 2018.
The next key event is going to be completely refinancing 2018 debt
maturities. Once those are dealt with the company is likely to begin
phasing back into the prior level of distributions.
As of September 30, 2016, the Partnership had total liquidity of $315.8
million (comprised of $268.4 million in cash and cash equivalents and
$47.4 million in undrawn credit facilities). Giving pro-forma effect to the
$125 million preferred unit issuance and NOK 900 million bond issuance
(net of associated NOK 292 million bond repurchase) in October 2016, the
Partnership's total liquidity as at September 30, 2016 would have been
approximately $490 million.
VALUATION
Thinking about valuation here isn’t rocket science. These companies are
priced off of their distribution level.
When TGP cut its distribution the unit price took it on the chin. When/if that
distribution rises the unit price is going to go back up.
If all goes right and TGP brings on the new builds as planned, and gets all
of the necessary financing in place the distribution could approach $2.80
per unit.
On the current trading price that is a yield of 15 percent.
A more reasonable yield might be around 9 percent which would push the
unit price to just over $30. You can see in the chart below that the yield for
similar companies is actually a little higher than that.
That would be a nice bit of capital appreciation to go along with a very nice
yield.
There shouldn’t be a lot of risk to getting there. Most of the debt financing
is now in place and there are long term contracts on place which secures
$12.2 billion of revenue.
I do like 15% dividends, but if the stock hits $30 I may re-look at my capital
gains.
WHAT THE ANALYSTS SAY
FIRM TARGET PRICE
JP Morgan $20.00
UBS $16.25
Wells Fargo $17 to $19
STOCK CHART
CONCLUSION
The TGP share price was down this past year because of the distribution
cut that it made in order to protect its balance sheet and minimize
dilution. As that distribution comes back the unit price will return to where it
was pre-distribution cut. That was over $45 a share, but maybe this only
goes to $30 & change. Still a great win and another double digit dividend
for me.
This company has 13 year backlog of revenue worth $12.2 billion. HUGE.
I love a great company that can compound capital at high rates of return for
years….but I have to admit that I love a good trade as well.