Teekay – the buzz from Seeking Alpha

There has been a considerable amount of bandwidth on the future outcome of Teekay and Teekay Offshore on the Seeking Alpha channel.

When you see this much bullishness on a public forum, watch out. The “news” (if you want to call it that) has already been baked in.

There is also a material amount of mis-information in some of the analysis presented on Seeking Alpha, including the J Mintzmyer analysis which got most of the flurry of TK/TOO posting started. There’s no point for me to argue about the fine details of the analysis here.

My original post about Teekay’s 2020 unsecured bonds of April 2016 still applies today – at a current price of 90.5 cents on the dollar they are in the lower part of my price range but not a wildly good buy as there is real risk involved. My initial purchase point was below 70 cents on the dollar back in early 2016. My only update to my April 2016 post is that I have long since offloaded my Teekay Offshore equity position – my optimism back then about TOO was considerably over-stated and when my own modelling changed, my price targets subsequently changed and I bailed out.

TK’s inherent value is primarily focused on their TGP entity (Mintzmyer got this correct, but grossly over-states the value of the company). Most of the discounting of TK unsecured debt’s value is that they are likely to offer guarantees to future TOO and/or TGP financings that would make it difficult for TK unsecured debtholders to realize value in the event of a Chapter 11 equivalent event (this would involve cross-defaults between entities and be incredibly messy to resolve). There is currently cross-default potential with TOO’s debt complex, not to mention that TK has made unsecured loans to TOO to bridge TOO’s liquidity situation. My general expectation is that there is a gigantic incentive for the controlling shareholder (Resolute Investments) to avoid a default scenario and would instead opt for a dilutive recapitalization instead, which would of course render TK unsecured debt maturing at par. I still think this partial recapitalization scenario is probable.

TK and TGP have announced dividends and distributions, respectively. The TK dividend surprised me somewhat as they are obligated to pay dividends by raising an equal amount in equity capital until a certain debt is paid off. TOO has been silent and they will likely be announcing suspensions in conjunction with some financing announcement in the upcoming weeks.

My assessment at present is that the only people that will be coming out of this with money are the debt holders. Such is life when oil is at US$45/barrel.

33 thoughts on “Teekay – the buzz from Seeking Alpha”

  1. Hi,

    I see that in July 2016 when the TK bonds were trading at 90.5, you were bullish with a large position and expectations that the bonds would move up beyond par. They did eventually breach par (slightly). Are you no longer long TK bonds? Also, why did you like the bonds so much in July 2016 but not as much today at the same price? Primarily because of the Arendal loan issue?

    Finally, I’d be interested in what you thought was wrong in Mintzmyer’s analysis.

    Thanks!

  2. My July 2016 post (http://divestor.com/?p=6985) might have given the impression I was buying TK debt at 90 cents, but I was observing other trades going on at that price. My purchases were around 70 cents and at 90 cents I would not have been interested (although it is cheap-ish, not a screaming buy price). The risk today is higher (TOO has been more of a gong-show than I originally anticipated from last year).

    As I said in the post above, I won’t go into the weeds of the Mintzmyer analysis, but as I wrote, he over-states TGP’s value, and under-appreciates TOO/TK debt guarantees. Your SA post of the mid-2018 table (from Mintzmyer) assumes value in TOO, which is the case if they avoid default, but if there is default, suddenly the margin of error becomes a lot more tighter since TGP needs more financing.

    TK gets bailed out if oil goes up of course. If prices are steady, it’s going to be a tough slog for them. TOO also has their own US$275M unsecured debt issue due June 2019… (17% YTM)

  3. There’s been a ton of volume on TK debt lately and today has been no exception. Today it is 2 hours to close and there’s already more than $10 million par value traded (largest trade volume I have seen in a day). Most of the action is around the 89 cent level with 9-$1million blocks trading.

  4. The action is crazy. It’s multiple standard deviations from normal. I don’t know what to really make of it. There’s clearly been a large seller distributing shares through a program — looks like he’s now met a buyer of size.

    What I find crazier is that TK equity and TOO equity/debt/preferred are all up well off lows — yet, TK bonds continue to be pressed down like someone’s got their thumb on the scale.

    And, the bonds are sr. to every one of the securities mentioned. They’re at the top of the publicly traded portion of the capital stack.

  5. @Landlord: I concur with your comments. There is considerable disparity with the TOO Prefs vs. their unsecured debt vs. TK’s unsecured. Unless if TK has some crazy scheme to strip the TOO/TGP/TNK control and equity stakes from the entity and leave a shell, it doesn’t make much sense for the TK debt to be as depressed unless if it is for technical reasons, as you’ve pointed out. There does seem to be a bid on at that 89 cent level.

    I don’t have more appetite for risk here so I will just gracefully watch it unless if things get more ridiculous later. If TOO finally announces a suspension of preferred distributions and they crash then depend on how much the preferreds crash it might be worth a shot, but it will be a painfully long wait while they try to mend the rest of the debt load.

  6. One of the reasons I’ve held fire on adding anymore to my position is that I think there’s a good chance the TOO preferreds will get suspended as part of a refi deal. That will crash the preferreds and while I generally want to stay away from TOO, the crashed preferreds could present a good setup. There may be an impact on the TK bonds as well even though it’s entirely credit positive from their perspective.

    If a refi/jv happens for TOO (which I strongly think it will happen even if it involves private equity — they’re not going bk over the Arendal) and nothing more than the common divs get cut, the bonds really should move higher on that news. However, I tend to think there will be a lag between the news and bond price reaction.

  7. TK debt is edging up over the past few trading days, now up to 91 cents. Guessing Mr. Moneybags who was dumping got rid of the supply they wanted to empty. Now we wait for Offshore’s announcement concerning preferred distributions – has to be paid before August 15, 2017 otherwise will be considered arrears.

  8. I think those 1MM+ trades mopped up the supply that was out there. The bonds bottomed out almost immediately after that. Rising equity doesn’t hurt either.

    Yeah, I kind of wish I had added back at 88.5 but we could very well get a second lick at this thing when TOO preferreds are announced. Either that, or TOO preferred could become attractive although there’s a lot more risk there.

  9. @Landlord: 88.5 is still at my “too cheap to sell, too expensive to buy” level, sadly. We’ll probably find out before the end of the month what will happen, or the latest would be around August 4th. The market trades like as if somebody has knowledge of the status of negotiations between management and the creditors, another reason why I am reluctant to trade around until this data point is resolved.

  10. I think you’re right that someone knows something. Right before the Arendal news hit, the stock price broke through key support levels. Someone knew and was selling. However, given the action this time around in the common, it could be the inside news is good.

  11. @Landlord: For what it’s worth, the past few business days I’ve been paid to lend TK debt to some entity that is shorting them. Rate they are paying is 1.83%.

  12. Wow, that’s really interesting. Obviously a very bold move by the party doing the shorting. Would also explain the seemingly limitless offer that’s reappeared in spite of a well supported equity price. I’d assume the party shorting is betting on a catalyst and the most likely catalyst is the outcome of TOO’s financing shortfall. Thanks for the heads up.

  13. Sacha,

    Paid to lend debt instrument – which broker pass through that rebate? Interactive Brokers?

  14. @Landlord/@Will: Yes, through IB’s short lending program. Rates range by the day but roughly 1.8-1.9% (customer gets half back).

  15. TK equity borrow has spiked from 2% on June 12th and has escalated now to 9.36%, the highest it has ever been. A lot of people piling into the short trade here.

    TOO borrow is 6.3% but their history has been around the 4-5% level for quite some time.

  16. I would have thought shorts would be covering on the move from 5.25 to 7.75. Seems like that move represents actual accumulation as opposed to just short covering.

  17. TK equity today looks like it is definitely going through a short squeeze (especially with TOO trading down). Bonds are hardly touched. I don’t have much of a stomach for equity drama at this time so I am happy to spectate instead of having my fortunes pinned on the outcome of this financing. My suspicion is that they will announce something and the next day they’ll be down 20%.

  18. Yeah, there’s no way the action is justified without the actual release of positive news. Could be setup for a sell the news reaction even if there is good news.

  19. Up 13% premarket. Wish I had bought some TK common when the bullish article on SA came out at 5.50. Bonds should go to par

  20. Yup, looks like I was wrong about the outcome of this situation! I will write a future post about it. No positions in any of the equity/common/preferred units of any of these entities, but pleased that TK unsecured is very likely to mature at par now (if not get called out later).

  21. Alls well that ends well when it comes to bonds maturing at par. I thought the outcome was 50/50 in terms of whether there could be another spike lower on news that would create another buying opportunity.

    So, I was mostly holding pat with my position until further clarity. However, after yesterday’s SeekingAlpha article by Downtown Investment Advisory I decided to top off my position with another 25k at 90.7. Timing worked out well!

  22. @Landlord: Congrats!! Talk about a quick win!

    About hoping for a spike down, as I always say, the market will continue to be open tomorrow, and there will be other distressed opportunities to investigate.

    The existing position of TK unsecured will be a good cash parking vehicle until the next big thing comes along (Any ideas? Would appreciate them…)

  23. Would appreciate your thoughts on the preferreds for a tiny E&P that’s actually a decent sized position for me. Gastar (GST A and B). They came back from the brink after the crash in oil prices by getting a huge liquidity injection from Ares Capital Mgmt. Ares owns 26% of the common and 100% of the firm’s $412M in debt. The preferred A is what I like and it tradess with a yield of 12% at 18.

    GST owns prime land in the STACK/SCOOP area and they should be able to drill wells with breakevens in the mid $30s for oil prices. There have been good results on the small number of wells that have already been drilled (IRRs like 40-50%) but much of their reserves remain unproven. However, this is changing with the drilling of 60 wells to be completed by the end of this year which will prove up a lot of acres. If you can sell the company for $12,000/acre (not unusual for land to go for 20K in STACK), the common is worth like $2. However, it’s the preferreds I like better which I think are worth par.

  24. @Landlord: “Under the agreement governing the Term Loan and the indenture governing the Notes, cash dividend payments are permitted through July 31, 2018 contingent upon the absence of any defaults. From and after August 1, 2018, dividend payments on the outstanding Series A and Series B Preferred Stock are permitted subject to the further condition that we are in compliance with a fixed charge coverage ratio of not less than 1.0 to 1.0 from August 1, 2018, to, but excluding May 1, 2019 and of not less than 1.25 to 1.0 from and after May 1, 2019.”

    There’s also a minimum liquidity requirement for the preferreds to get paid out. Looks like Ares (looking at the cash flows) is sucking every penny out of this company (which does make money before financing charges), so the risk appears to be appropriately priced (on first glance) for the preferred shares. Clearly if oil goes up then this company looks better and more secure. I haven’t done any balance sheet analysis (you suggest an asset sale would fetch a higher value) which would favour the equity in that case…

  25. This company is one that really takes some getting to know to understand. They were originally a gas shale player in the Utica (West Virginia) play. They did great by buying unproven land cheap and proving it as very productive but the collapse of NG prices ruined the economics of production. Eastern shale gas was decimated and trading at $1 due to totally insufficient pipeline infrastructure.

    So they sold that land at unfortunately the bottom of the NG market and used proceeds to buy unproven land in the STACK play in Oklahoma (second most lucrative play in North America next to the Permian basin in TX). They got it cheap and preliminary results show the land could actually be quite valuable. However, then the oil market collapsed, financing dried up and they had no money to prove their assets with drilling.

    They almost went bk and I bought preferreds at 3.50 in 3/2016. Ares then came in and refi-ed all their debt and imjected a bunch of equity in them so they have the money needed to drill and prove their land. Preferreds rocketed up to 22.50, I made the mistake of not selling and they’ve pulled back to 17.50 on the pullback in oil (but there’s no pullback in oil!)

    Basically, GST is a pure play on whether their drilling is successful or are busts. Sure oil prices matter to a degree because their wells won’t be profitable below $35 (but no North American shale/sand is profitable at those prices). But basically it’s a play on drilling success. If they can achieve IRRs of 30-40% on the money spent drilling, the common will do well. If they get IRRs in the 15-30% range the preferreds are par and the common is $1-2. Below 15% and debt servicing is tight.

    Preliminary results are in the 30-50% range (based on May 2017 strip prices) and we’ll know a lot more in six months.

    The end goal of drilling is to prove that an inventory of 1000 wells exists on their land and the wells can achieve 30% IRRs. If they can prove that, then Ares and all other capital holders do well.

  26. Just as a side note, TK equity borrow rates have gone up to 30%. Very odd. Half my debt is also still being borrowed for shorting.

  27. 30% is crazy. Perhaps Resolute and Cobas have said they will no longer lend out shares to short sellers.

    I haven’t sold my TK bonds. My price target is a YTM equal or lower than then the TOO 2019 bonds. Shorts will have to cover before rationality is restored to pricing.

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