US analyst Michael Webber has questioned the value of Teekay LNG Partners' (TGP) incentive distribution rights (IDR) deal with parent Teekay Corp.
Teekay built its holding in the MLP to 42% by swapping its IDRs for 10.8m new shares, in a transaction it said removed "uncertainty" for other investors.
The parent now owns 36m shares in the partnership and remains the sole owner of Teekay GP, the general partner of Teekay LNG.
IDRs award a general partner a greater share of the profits of a partnership as revenue increases.
But Webber, managing partner of Webber Research, said: "We certainly hope TGP gives some pretty spectacular distribution guidance on next week’s earnings call because it effectively just pre-paid a theoretical $123m bill three years early to a related party, in the middle of a global pandemic and energy crisis."
Webber is lowering the Teekay LNG target price to $9 from $16 as a result.
Fearnley Securities said dividends would need to be higher than 41.25 cents before the IDRs came into play.
Market reaction was relatively muted, with Teekay LNG and Teekay down 0.5% and 5% respectively.
Webber said he viewed this more as a shrug than an endorsement.
Market fatigue
"We think this deal says more about the state of the market than anything else – specifically the degree of market fatigue, the MLP sector’s history of value-destructive IDR simplifications, and a unitholder base that’s been gradually conditioned to expect less and less from GPs - regardless of performance, or any illusion of alignment," he added.
Webber said: "We heard some iteration of 'We’re just glad it’s over with' or 'I’m just glad they didn’t take more' in nearly every conversation we’ve had about this deal.
"While that’s hardly a ringing endorsement, that kind of apathy is also a current market reality for laggard LPs – unfortunately unitholder expectations are just that low at this point."
Teekay LNG will now be paying out $11m to $22m a year in additional distributions to Teekay, simply to avoid an unlikely headwind that only truly exists in a blue-sky scenario, two to three years from now, Webber added.
"Yes, there’s an argument that TGP’s IDRs were holding the stock back today – although that premise seems less and less relevant, and partially a function of inertia. Regardless, we don’t believe it was a headwind worth anywhere [near] $123m."
Mark Kremin, chief executive of Teekay Corp's Teekay Gas Group, had said: "This important transaction creates greater alignment between our sponsor, Teekay, and the rest of our common unitholders, and we believe that it removes one of the primary uncertainties for investors in Teekay LNG,"
He added that with fixed-rate charter coverage at 98% and 94% of the fleet in 2020 and 2021, and with its cash distributions up by more than 30% for the past two years, it is well placed to continue its capital allocation plan of debt reduction and investor returns.
"This transaction simplifies Teekay LNG’s capital structure and is beneficial to both parties," Teekay Corp chief executive Kenneth Hvid said.
But Webber said: "Most of the cash-flowing assets used to (effectively) support the $123m payout to Teekay were developed and warehoused directly at Teekay LNG as opposed to Teekay.
"Hence, Teekay LNG unitholders would have to pay the carry costs of those assets, and then use a portion of [this] eventual cashflow to fund Teekay's out-of-the-money IDR takeout, nearly five years after the burden of self-funding some of the same assets that helped drive the massive distribution cuts at Teekay Offshore and Teekay LNG which pushed the IDRs out-of-the-money the first place. I mean, what’s not to love?"
