New York-listed Teekay Corp has added to its shareholding in its Teekay LNG Partners spin-off in a share deal that removes "uncertainty" for other investors.
The two companies have agreed to scrap all incentive distribution rights (IDRs) in exchange for awarding the parent nearly 10.8m newly-issued Teekay LNG common shares.
The parent now owns 36m shares in the partnership and remains the sole owner of Teekay GP, the general partner of Teekay LNG.
This gives it an overall 42% holding.
IDRs award a general partner a greater share of the profits of a partnership as revenue increases.
"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," Mark Kremin, chief executive of Teekay Corp's Teekay Gas Group, said.
Charter coverage in place
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.
"With a market-leading position, strong contracted cash flows and an improving balance sheet, we believe that Teekay LNG is and will remain a true market leader in the LNG transportation industry for the long-term."
Fearnley Securities has Teekay LNG as a 'buy'.
A bit rich?
"At first look the valuation looks a bit rich, considering the IDRs presently are not yielding anything," the investment bank said.
"For comparison, cash multiples on IDR exchange in the sector have been around 10 to 15 times."
To reach even the bottom of this range, dividends would need to be back to 60 cents per quarter, compared to 25 cents currently, it added.
"Moreover, dividends would need to be higher than 41.25 cents before the IDRs come into play."
The stock rose 3% on Monday in the US, so "we shouldn’t take too lightly the 'softer' sides of this transaction, eg the potential positive impact on future distributions and simplifying the corporate structure", the investment banking arm of shipbroker Fearnleys added.
However, the shares are is down 25% year to date, largely reflecting weakness across the sector, Fearnley Securities said.
But the bank views Teekay LNG as different from its peers in that it holds a $10bn backlog with top-tier counterparties such as Novatek, Shell, Chevron and RasGas.
The gas carrier also has almost no spot exposure for the next two years.
"There are also good arguments for a fundamentally stronger spot market come 2022- 2023, a period where 11 of 48 LNG carriers roll off," Fearnley Securities said.
"The stock trades at three times earnings and yields 11 [times]. In short, one of the largest mispricings within our universe."
