Completion of Investments
The share price of Teekay Corporation (NYSE:TK) has been on a steady uptrend and has far outperformed the broader markets with a return of over 60%. Sufficient the last results that posted company were strengthened from the consolidation of Teekay Tankers (KNP). It is important to mention that TK still has control over TNK through its class B supervoting shares. The stock has shown some volatility over the past few months, but I think the uptrend will continue as the fleet market has been volatile. Fees seem to have peaked during the supply chain issue some time ago. Spot rates are down almost 50% for some, but I think most investors didn’t see those levels as something that could be sustained for a long period.
Where I see the value in TK comes a much from the fact that it still looks pretty discounted compared to the amount of capital it has, over $1.6 billion in total using the last 12 months’ results. Just from an equity valuation per share, we get $18.6, indicating significant upside potential from here. I’m rating the company a buy, regardless of the development in the last two weeks.
TK is involved in global crude oil and marine transportation services on an international scale. The company owns and manages a fleet of crude oil and refined product tankers, providing ship-to-ship support services, commercial tanker management, technical management operation services and various marine operational and maintenance services. With approximately 54 vessels owned and chartered as of March 1, 2023, TK plays an important role in the maritime industry, catering to the transportation needs of crude oil and related products worldwide.
For now, there is strong supporting foundations about 6 more strong months for the tanker market and this may be why TK shares have risen over the past 12 months. Exports appear to be on the rise again and this will drive higher utilization and demand for tankers. We’ll dive deeper into last quarter’s results for TK below, but one trend that was noticed is higher revenue despite softer rates. Revenue grew quite well at 2.6% annually and even more so over the past 9 months at 41%.
Where TK has also been attractive to investors is the amount of buybacks they are doing. At the beginning of this year they announced an additional $25 million of capital is authorized to be used for share repurchases. The latest program has approximately $5 million remaining and as of August 2022 the company has managed to reduce the outstanding portion by over 10%.
TK is experiencing significant growth, with its value increasing by about $0.15 to $0.20 per share each month. This increase is attributed to the strong free cash flow generated by TK’s stake in TNK. TNK’s net cash position serves as a stabilizing factor, mitigating potential management risks and contributing positively to TK’s overall financial health and shareholder value. This FCF generation has been a major reason why TK has been able to buy as many shares as it has. Despite there being a consolidation of their stake in the company, I expect there to be a strong FCF generated going forward that will help further buyback plans and drive shareholder value.
The latest quarterly report that TK provided showed strength in my opinion as revenues increased year over year and travel expenses continued to fall further. That didn’t generate a year-over-year increase in the bottom line, as in the latest quarter the company had a gain on asset sales of $21 million, which pushed earnings higher. When we don’t count that one-time gain, we instead see an annual increase in vessel operating income of nearly 30%. This is impressive and I think the main reason has been the flexibility that the company has regarding its contracts.
The company does not have most of its fixed fees. This gives more flexibility to the company and they can take advantage of the rapid increases in spot rates and ultimately deliver higher results as seen in the third quarter report. Going into the next few reports, I think TK can deliver solid growth to the top line. TNK did more in the last quarter, bought back more vessels and YTD has bought 19 vessels previously held under sale-leaseback agreements. Additionally, in the first quarter of 2024, it may purchase an additional 8, which I believe they will do as well. This fleet expansion is something that makes me look forward to future reports from the business.
Traditionally, tanker stocks show an upward trend alongside growth crude oil prices. However, actual market dynamics introduces a level of uncertainty, with murky rumors suggesting Saudi Arabia may implement supply cuts to boost prices. If such cuts are made, demand for tankers may decrease. Complicating this, the industry is currently in its slowest season and rates have fallen significantly in the latter part of the third quarter. In the event of additional supply cuts, there is a possibility that the market will perceive Teekay Corporation at a lower valuation due to uncertainties surrounding short-term demand.
Despite these short-term challenges, it is essential to recognize TK’s strong asset base, which positions the company favorably in the long term. While short-term fluctuations can affect stock performance, the underlying strength of TK’s assets suggests that any downturn is likely to be temporary and the company remains well-positioned for sustained success over the extended horizon.
When we look at the balance sheet of the business, I think it presents a lot of quality now that some improvements have been made. For example, consolidating some of its holdings in TNK has resulted in a steadily growing cash position, one that is now $188 million, up from $129 million at the end of 2022. When counting cash in TNK, it it reaches over $400 million right now. As of December 2022 there has been a decline in total assets though by about $100 million, partly due to the reduction in short-term investments the company has on the books. I don’t see this as anything to worry about as the equity per share is still at $18.3 right now, indicating a pretty strong discount rate.
Perhaps what impressed me the most is the debt the company has. The parent company, which is TK, has no current debt, but only $61 million in other long-term liabilities. With the cash position highlighted, this seems easily manageable. For TNK, long-term debt and finance leases have gone from $472 million at the end of 2022 to below $130 million, mainly due to vessel buybacks that have reduced finance lease costs. At its bottom, equity for TK is at $1.6 billion now, and with a market cap under $700 million that’s significantly below the current equity for the business, and investing based on a discount to the present value of equity leaves a good one. opportunity here. I don’t think TK presents any risk that would reduce it by more than 50% against the equity value. Based on the current price, this is a 150% increase at least if it reaches the $18 mark. $1.6 billion in total equity along with negative net debt of over $200 million leaves a total valuation of $1.8 billion and with $100 million outstanding I arrive at a target price of $18. To balance this out a bit, since I don’t think we’ll see such a high rise in price unless there’s a rapid rise in spot rates that would catapult net income further, then we might look at NAV instead -in. With $283 million in cash and cash equivalents and a $428 million stake in TNK, the net asset value stands at $711 million now. With shares outstanding of 92 million since the last report, we get a NAV per share of $7.72, or an upside of 7.7% in the near term. That’s enough to justify a purchase here in my opinion.
TK’s share price has been on a very steady rise for the past 12 months and has narrowly beaten the broader markets. Trends seem to point to higher export levels and activity in the crude oil market and this could lead to higher spot rates for TK and result in even better net income results. I think the share price has now fallen to a point where a buy case can be made. It is discounted on a NAV and equity per share basis to a degree where growth is too good to pass up. I think exposure to this market is beneficial for a diversified portfolio and will rate TK as a hedge buy here for the first time, and I look forward to following it further.