Seadrill Chapter 11 details

Seadrill, a publicly traded company that does offshore oil drilling, filed a Chapter 11 arrangement. The salient terms of the pre-packaged deal are:

The chapter 11 plan of reorganization contemplated by the RSA provides the following distributions, assuming general unsecured creditors accept the plan:

• purchasers of the new secured notes will receive 57.5% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan;
• purchasers of the new Seadrill equity will receive 25% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan;
• general unsecured creditors of Seadrill, NADL, and Sevan, which includes Seadrill and NADL bondholders, will receive their pro rata share of 15% of the new Seadrill common stock, subject to dilution by the primary structuring fee and an employee incentive plan, plus certain eligible unsecured creditors will receive the right to participate pro rata in $85 million of the new secured notes and $25 million of the new equity, provided that general unsecured creditors vote to accept the plan; and
• holders of Seadrill common stock will receive 2% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan, provided that general unsecured creditors vote to accept the plan.

This is one of those strange instances where the common stock was trading like something terrible was going to happen, but in relation to its closing price Monday, they received a relatively good “reward” out of this process, 2% of the company (compared to zero if creditors take this to court).

The question is whether the unsecured debtholders will agree to this arrangement – my paper napkin calculation suggests that bondholders will get about 10 cents on the dollar (probably less after the “subject to dilution” is factored in) compared to the trading around the 25 cent level before this announcement.

Their alternative is that if they vote against the deal, the secured creditors will receive everything.

Please read the Pirate Game for how this will turn out and also a lesson on why being an mid-tier creditor in a Chapter 11 arrangement that requires all capital structures to vote in favour of the agreement can be hazardous to your financial health.

I will also note that Teekay Offshore effectively went through a recapitalization, and this leaves Transocean and Diamond Offshore that both in relatively good standing financially.

Teekay / Teekay Offshore / Brookfield financing

Brookfield Business Partners (TSX: BBU.UN) announced a $750 million investment (Brookfield’s release) (Teekay’s release) in Teekay Offshore (NYSE: TOO).

I’ve written extensively about Teekay Offshore and thought they would cut their distributions to zero and likely cutting their preferred unit distributions because of impending financing issues. This prediction turned out to be mostly incorrect – they are cutting their common unit distribution to 1 penny per quarter (down from 11 cents), and maintaining their preferred distributions.

In general, my expectations for the outcome for this pending recapitalization transaction have been worse than what materialized.

Not surprisingly, Offshore’s preferred units are trading considerably higher in the markets – up about 28%.

Teekay (parent) unsecured debt traded up to 98.5 cents on the dollar today – I am happy regarding this transaction – it is likely to mature at par (January 2020) or earlier via a call option. Offshore debt holders have even more reason to be happy – theirs are up from 82 cents to 97 cents, with a 7% yield to maturity. (On a side note, I notice somebody was asleep at the switch at 5:00am today – there was a $100k bond trade for 90.8 cents on TK unsecured, which was a steal for the buy-side – NEVER leave those GTC orders out in the open unless if you’re willing to scan the news before the market opens!).

Summary thoughts (apologies in advance for this not being in a more professional manner, I am not writing from my usual location):

The first chart is from their today’s presentation, while the second chart was from an early 2016 presentation. Compare the two:

1. With this equity injection, Offshore buys itself a couple years of time (which is what they desperately needed) – however, their debt leverage goes from “very high” to “above average” – slide 9 is considerably above what they were anticipating in their 2016 slide when they initially recognized the pending financial crisis. Pay attention to the Y-Axis of those charts!
2. Teekay dumps its $200 million loan to Brookfield for $140 million cash and 11 million warrants in Offshore;
3. It’s not entirely clear what the terms of these warrants are, or how Brookfield picks up 51% control of the GP (they get 49% of it right now);
4. Offshore’s financial metrics (cash flows through vessel operations) should start to improve, but I suspect there will be upcoming challenges as long as the oil price environment is not supportive (thinking counterparty risk, potential future contract renewals, pricing pressure, etc. – examining Diamond Offshore, TransOcean, etc., although not strictly in the same market as TOO, leads one to believe that the present environment is also not favorable to maintenance offshore oil production expenditures);
5. Teekay also liquidated their preferred unit holding in Offshore, and this is functionally a sell-off to Brookfield.
6. The creation of a “ShuttleCo” subsidiary of Offshore will create some more financial complexity in the operation – they probably want to spin this out for valuation and/or leverage purposes (as this division apparently is doing reasonably well).
7. Offshore’s operational challenges and risks are still not going away with this equity injection, but Teekay has more or less divested as much as they could from them.
8. Teekay also get relieved of guarantees from Offshore, which will improve its financial position dramatically in the event of insolvency (this is huge for Teekay unsecured debt holders). Teekay is functionally at this point a play on their LNG daughter entity, while having some minority economic participation in offshore.
9. Teekay’s cash flows through Offshore will obviously be curtailed significantly, they have their own vessel operations which are cash neutral, so they will be solely reliant on either equity distributions of Offshore (if they decide to fully liquidate) or LNG’s distributions.

If I was an investor in the preferred shares or debt of Offshore, I’d be taking gains right now and going elsewhere.

I remain long TK unsecured debt and do not have any intentions to sell – I took a full position back in them last year. I’m not keen on any of the equity.

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.

Q2-2017 Performance Report

Portfolio Performance

My very unaudited portfolio performance in the second quarter of 2017, the three months ended June 30, 2017 is approximately +0.6%. The year-to-date performance for the 6 months ended June 30, 2017 is +19.3%.

My 11 year, 6 month compounded annual growth rate performance is +18.2% per year.

Portfolio Percentages

At June 30, 2017 (change from Q1-2017):

20% common equities (-4%)
28% preferred share equities (+8%)
31% corporate debt (-7%)
4% net equity options (+1%)
18% cash and cash equivalents (+3%)

Percentages may not add to 100% due to rounding.

USD exposure: 52% (+2%)

Portfolio is valued in CAD (CAD/USD 0.7714);
Other values derived per account statements.

Portfolio commentary

All things considered, the nearly flat performance was a good indicator of a relatively boring quarter – there was very little theatrics to discuss. Major portfolio decisions include liquidating my KCG Holdings equity stake, and retaining the equity options until the last possible nanosecond before expiration. I will promptly liquidate the position if the market is acceptably close to the USD$20.00 cash buyout number (or I will just wait for the transaction to proceed). This will result in an effective liquidation of another 4% of the portfolio. I also have another 4% position in their senior secured bonds which will be called out after the transaction completes, which should be around July 21st (after the quarter-end). The net result of these transactions are that the portfolio is effectively 25% cash and I have no idea where to deploy it beyond VGSH (USD) and VSB.TO (CAD) – at least with those I get paid around 125 basis points to wait.

Sadly my entries into the VGSH/VSB.TO short-term fixed income vehicles has been incredibly lacklustre – with continued threats of rising interest rates, even these short duration vehicles are taking a minor hit of capital value – an inexpensive lesson that yield is rarely risk-free.

I took a single digit percent position in a company trading well under tangible book value and earning positive income and cash flows during the quarter. I estimate when the market wakes up to this position (there has been little if any analyst coverage, nor has there been any public exposure to it at all) it will trade up to double its present value. I won’t write about this one until it appreciates or my original investment thesis is incorrect. There is a credible reason why there is still price pressure even at the depressed levels. The company has spent most of its public life trading around 25% higher than what it is trading at right now.

This was my first new common share position in over a year. I’ve been close to pulling the trigger on some other ones but they didn’t quite reach the correct price point.

I also took a non-trivial stake in DRM.PR.A preferred shares. I’ve been in and out of this over the past couple years, but this time I suspect it will be a staple position for quite some time. It only requires 33% margin so it is not too much of an anchor to keep, especially since the spread between the margin rate and the dividend rate is huge. This is effectively a “cash parking” vehicle until they get called away by the parent company (I was expecting this to happen quite some time ago). When it happens I will have the problem of more capital going from a near-guaranteed 7% tax-preferred income to 1%. It is my hope that management continues to ignore this issue (other than paying quarterly dividends). I wouldn’t buy it at the current premium.

That’s about it for the quarter.

In terms of price movements, there were three items which caused negative portfolio movements. Genworth MI took collateral damage with regards to the collapse of Home Capital Group, but has swiftly recovered from reaching a low of about $30.50/share. At that level, Genworth MI was in the low end of my price range, but it wasn’t low enough that I would re-purchase shares. Conversely, it is too cheap to sell at present prices. So I will be waiting and continuing to collect 44 cent quarterly dividends until the market decides that the equity is worth more.

Teekay Corporation unsecured debt also significantly declined to reflect the calamity that is hitting their offshore division, but I do not believe the underlying value of this debt is compromised by virtue of the value of their natural gas division. This was the primary detractor from my portfolio performance this quarter. At a YTM of 13%, investors have a decent risk/reward situation at current prices.

The third detractor to performance was the Canadian dollar – as it appreciates, although I appreciate the purchasing power, it does detract negatively on my US dollar components. Since my portfolio is nearly 50/50 CAD/USD, each percent the Canadian dollar rises means a half percent drop in my portfolio value.

Finally, Gran Colombia Gold announced they will be redeeming 5.7% of their 2020 senior secured debt outstanding at par. I will be pocketing the cash and looking forward to future payments – this series of debt is first in line, secured by a gold mine and an investor can be patient to collect on the debt. Although I do not have a place to deploy the cash, I look forward to receiving the payment and reducing my concentration in this particular debt issuer (I purchased most of the senior secured debt at around 55-60 cents on the dollar). The two relevant risks here are the political stability in Colombia (which is not bad at present) and the price of gold continuing to meander at its present level – or go higher. 75% of the free cash flows from the company have to go towards redeeming the senior secured debt due in 2020, so over time I will expect to get paid back.

The portfolio underperformed the S&P 500 slightly, while outperforming the TSX. I do not invest for relative returns, but psychologically it always feels better to know that somebody is losing more money than I am. The portfolio in the last quarter has also underperformed my 11.5 year CAGR (Compounded Annual Growth Rate), but this is to be expected given my very risk-adverse positioning at present. I will warn readers that my +18.2% CAGR is likely to decline in the upcoming quarters as making a percent or two each quarter is below the +18.2%/year benchmark.

Outlook

Crude oil markets are trending significantly lower than what most participants thought would be happening. This is having a significant impact on most Canadian oil and gas companies, whom have been continuing to address leverage matters. While prices imply there is pressure, it is not yet at a crisis point that it was back in February 2016, but if the prevailing trend continues, it definitely appears that there will be some more fractures in the Canadian oil and gas space due to excessive leverage levels. There may be opportunities in the debt market at this point (witness the calamity hitting Teekay right now).

In the USA broad market, the S&P 500 is dominated by the top 10 companies (Amazon, Facebook, Google, Netflix, etc.) and when extracting out those liquidity high-flyers, we have a market that is treading water and some targets of opportunity are starting to emerge that have value-like characteristics. However, the US federal reserve is slowly tightening the screws in terms of loose monetary policy and this most certainly will have a continued dampening effect on equity valuation as the cost of capital continues to rise. They are doing this slowly as to not trigger a market crash, but most participants should be alerted that the 30-year treasury bond, currently at a yield of about 2.8%, is not rising despite the rising-rate environment. This is something to be very cautious about.

The Bank of Canada also spooked the markets in the second week of June when they were making public noise about increasing the interest rates. Although I do not predict they will take much action, if any, until the corresponding long bond rates rise, this may have the effect of putting a bottom on the slow and steady decline of the Canadian dollar. Clearly the commodity markets are not helping Canadian currency, and if there is some sort of return in commodities, then the Canadian dollar would actually be better positioned for a rise.

In general, I continue to remain bearish. Although this stance has not been in correspondence with the major indicies (which have risen considerably), my portfolio continues to generate a positive return while remaining extremely risk-adverse at present time. I am of the general belief that index investing continues to dislocate pricing in the market from true value and this trend is not likely to abate until such a point that it is identified that pouring capital in a non-price discriminatory vehicle is not a prudent way to invest money – instead, it is diversifying through obscurity and not achieving true risk reduction.

I am finding it very difficult to invest cash in this environment. It is painful to wait, but waiting I will do.

The average maturity term on my debt portfolio is just a shade over 30 months. This will continue to lower as my issuers go down to maturity. I am not interested in long-duration bonds at all at the moment.

I project over the rest of this year, if things go to a reasonable level of fruition, that I will see another 2-3% of appreciation, while taking little risk. This is also assuming that I do not see further candidates for investing the non-trivial amount of cash in the portfolio. Nothing imminent is on the horizon. My research pipeline has been bone-dry.

To put a polite summary to my investment prospects, I feel stuck. Little in the pipeline and little of inspiration. Waiting is not popular, but it will allow me to preserve capital for the time where it will be more appreciated.

(Update, July 17, 2017: After doing my internal audit, the quarterly performance was revised from +0.7% to +0.6% for the quarter. The year-to-date was revised from +18.7% to +19.3% due to a rather embarrassing formula error on the tracking spreadsheet. The changes are reflected in the numbers above. The 11.5 year CAGR remains unchanged.)

Portfolio - Q2-2017 - Historical Performance

Performance and TSX Composite is measured in CAD$; S&P 500 is measured in US$. Total returns indices are with dividends reinvested at time of receipt.
YearDivestor PortfolioS&P 500 (Price Return)S&P 500
(Total Return)
TSX Comp. (Price Return)TSX Comp.
(Total Return)
11.5 Years (CAGR):+18.2%+5.9%+8.2%+2.6%+5.6%
2006+3.0%+13.6%+15.6%+14.5%+17.3%
2007+11.7%+3.5%+5.5%+7.2%+9.8%
2008-9.2%-38.5%-36.6%-35.0%-33.0%
2009+104.2%+23.5%+25.9%+30.7%+35.1%
2010+28.0%+12.8%+14.8%+14.5%+17.6%
2011-13.4%+0.0%+2.1%-11.1%-8.7%
2012+2.0%+13.4%+15.9%+4.0%+7.2%
2013+52.9%+29.6%+32.2%+9.6%+13.0%
2014-7.7%+11.4%+13.5%+7.4%+10.6%
2015+9.8%-0.7%+1.3%-11.1%-8.3%
2016+53.6%+9.5%+12.0%+17.5%+20.4%
Q1-2017+18.6%+5.5%+6.1%+1.7%+2.2%
Q2-2017+0.6%+2.6%+3.1%-2.4%-1.6%

Dividend suspensions – Aimia, and soon-to-be Teekay Offshore

Aimia (TSX: AIM) suspended their common and preferred share dividends today. While this decision could have been entirely anticipated, the market still took the shares down another 20-25%. If you read between the lines from my previous post on them, this should not have been surprising. Nimble traders that were awake around 9:40am Eastern Time could have capitalized on an intraday bounce, but the current state of the union is likely to be short-lived since the company still has to figure out how to work its way out of a negative $3 billion tangible equity situation and pay the deluge of rewards liabilities. This will probably not end up well.

And in a “tomorrow’s news today” feature, it is more probable than not you will see Teekay management finally tuck in their tails and suspend dividends entirely on Teekay (NYSE: TK) and distributions from common and preferred units of Teekay Offshore (NYSE: TOO). When the announcement will be made is entirely up to management but it will likely be before the end of the month. What is funny is that I called it a couple weeks in advance (post is here), while it took a Morgan Stanley analyst a few days ago to actually cause a significant market reaction in the share price while everybody rushes for the exit. Teekay Offshore unsecured debt is now trading at 17% and with their preferred units still at 12%, it doesn’t take a rocket scientist to figure out what’s going to happen next – they desperately need a few hundred million in an equity infusion and they will be paying for it dearly.

As a bondholder in Teekay’s unsecured debt, I’m curious to see how management will bail themselves out this time. Since I do not believe they are interested in losing control, I still believe the parent company’s unsecured debt looks fairly good since there isn’t much ahead of it on the pecking order in the event of an unlikely liquidation event.

Thoughts on Teekay Offshore have not changed

Teekay Offshore (NYSE: TOO) reported their Q1-2017 results last night and they were lacklustre. In particular, the introduction of a litigation dispute with their largest customer, Petrobras, in respect of the operation of an offshore rig is not helping matters for them.

Last quarter I wrote about how Teekay Offshore units are “not going anywhere“, and that was an understatement considering this stock graph in the interm:

The next pillar to fall is their common unit dividend. Teekay traditionally declares dividends at the beginning of the calendar quarter and pays them out mid-quarter. I would expect there would be a 50/50 chance that they will suspend common dividends at the end of June or early July, and this would probably have a negative impact on their unit price. There is also an outside chance that they would decide to suspend their preferred unit dividends at the same time until they have shored up their financial resources.

The reason for this would be that they have not stabilized their financial position. With approximately 149.7 million units outstanding, the cash outflow of $16.5 million/quarter is something they really need to be putting into their outstanding debt. Preferred units receive around $11 million/quarter in cash in distributions and in a couple years, another series of preferred shares will switch from payment-in-units to payment-in-cash distributions (another $10.5 million/year).

Saving $27 million a quarter in distributions has to be attractive for a management that needs to repay $589 million in 2017 (this information is from their 20-F filing for their 2016 annual report). Cash flows through vessel operations will bridge some of this, but they are still missing some capital to make it through. They are also uncomfortably close to a debt covenant that they maintain total liquidity of at least 5% of their total debt (which is about $150 million in liquidity).

If you remember this chart from an earlier presentation when they got investors to chip in another $200 million in equity (April 2016):

CFVO (Cash flows through vessel operations) in Q1-2017 was $141.3 million, while net debt is ($3.12 billion gross minus $0.29 billion cash = $2.83 billion) – doing the math, we have ($2,830 / 4*$141.3) = 5.00 Net Debt/CFVO ratio!

This is way off the original 4.5x target as projected by management and this is getting into very dangerous territory where management has to take other measures to get the balance sheet back into a reasonable condition.

The only silver lining I can think of is that net debt has dropped $13 million for the quarter, but this is such a minor fraction of the overall net debt that it is relatively inconsequential.

Thus, I will predict that short of another form of recapitalization (or extremely dilutive equity offering), management will likely cut distributions from Teekay Offshore.

On a side note, I have gotten used to the “personality” of their quarterly reports and presentations as they release them and they are quite skillful at illuminating the information that they want you to be seeing and not paying any attention to the worms and termites that are crawling under the rocks. These nuggets of information are usually buried in the subsequent (weeks later) 6-K filings they report to the SEC. Also they are quite good at not reconciling their current situation with past expectations as you can see in the above post of their CFVO/Debt chart.

Teekay Offshore’s common units are not going anywhere

Reviewing Teekay Offshore’s financial results (NYSE: TOO), it strikes me as rather obvious that they have missed their initial early 2016 targets when they proposed a partial equitization (issuing common units, preferred units, and some refinancing) of their debt problems. They also borrowed $200 million from the Teekay parent entity (NYSE: TK).

In Q1-2016, they delivered a presentation with this chart:

In subsequent quarters, the company has generally not referred to progressing tracking to this projection, mainly because their debt to cash flow through vessel operations ratio has not met these targets. While the underlying entity is still making money, revenues are eroding through the expiration and renegotiation of various contracts, couple with some operational hiccups (Brazil) that is not helping matters any.

Putting a lot of the analysis away from this article, while in 2017 the future capital expenditure profile is going to be reduced (which would greatly assist with the distributable cash flows), the company doesn’t have a lot of leftover room for matters such as debt repayment and working on improving their leverage ratios in relation to cash generation ability. This leaves them with the option of continuing to dilute or depend on the parent entity for bridge financing. Indeed, one reason why I believe management thinks the company is still open for dilution is due to them employing a continuous equity offering program – they sold nearly 1.9 million units in the quarter at an average of US$5.17/unit. If they don’t think the company is worth US$5.17/unit, why should one pay more than that?

I don’t believe that they are a CCAA-equivalent risk in the current credit market (this is a key condition: “current” credit market), and I also believe that their preferred units will continue to pay distributions for the indefinite future, I don’t believe their common units will be outperforming absent a significant and sustained run-up in the oil commodity price. Note that there is a US$275 million issue of unsecured debt outstanding, maturing on July 30, 2019, which will present an interesting refinancing challenge. Right now those bonds are trading at around a 10% yield to maturity.

I have no positions in TOO (equity or debt), but do hold a position in the Teekay Parent’s debt (thesis here).

Teekay Corporation – Debt

Over the past couple months I have accumulated a substantial position in Teekay Corporation’s (NYSE: TK) unsecured debt, maturing January 15, 2020. The coupon is 8.5% and is paid semi-annually. I am expecting this debt to be paid out at or above par value well before the maturity date. The yield to maturity at my cost I will be receiving for this investment will be north of 20% (and obviously this number goes up if there is an earlier redemption).

tk

I was really looking into the common shares and was asleep at the switch for these, especially around the US$7-8 level a month ago. Everything told me to pull the trigger on the commons as well, and this mistake of non-performance cost me a few percentage points of portfolio performance considering that the common shares are 50% above where I was considering to purchase them. This would have not been a trivial purchase – my weight at cost would have been between 5-10%.

However, offsetting this inaction was that I also bought common shares (technically, they are limited partnership units) of Teekay Offshore (NYSE: TOO) in mid-February. There is a very good case that these units will be selling at US$15-20 by the end of 2017, in addition to giving out generous distributions that will most likely increase in 2018 and beyond.

The short story with Teekay Corporation debt is that they control three daughter entities (Teekay Offshore, Tankers, and LNG). They own minority stakes in all three (roughly 30% for eachUpdate on April 26, 2016: I will be more specific. They have a 26% economic interest and 54% voting right in Teekay Tankers, a 35% limited partner interest in Teekay Offshore, and 31% limited partnership interest in Teekay LNG), but own controlling interests via general partner rights and in the case of Tankers, a dual-class share structure. There are also incentive distribution rights for Offshore and LNG (both of which are nowhere close to being achieved by virtue of distributions being completely slashed and burned at the end of 2015). If there was a liquidation, Teekay would be able to cover the debt with a (painful) sale of their daughter entities.

Teekay Corporation itself is controlled – with a 39% equity stake by Resolute Investments, Ltd. (Latest SC 13D filing here shows they accumulated more shares in December 2015, timed a little early.) They have a gigantic incentive to see this debt get paid off as now do I!

The mis-pricing of the common shares and debt of the issuers in question revolve around a classic financing trap (similar to Kinder Morgan’s crisis a few months ago). The material difference that the market appears to have forgotten about is that Teekay Offshore (and thus Teekay Corporation’s) business is less reliant on the price of crude oil than most other oil and gas entities. The material financial item is that Teekay Offshore faces a significant cash bridge in 2016 and 2017, but it is very probable they will be able to plug the gap and after this they will be “home-free” with a gigantic amount of free cash flow in 2018 and beyond – some of this will go to reduce leverage, but the rest of it is going to be sent into unitholder distributions assuming the capital markets will allow for an easy refinancing of Teekay Offshore’s 2019 unsecured debt.

At US$3/share, Teekay Offshore was an easy speculative purchase. Even at present prices of US$7/share, they are still a very good value even though they do have large amounts of debt (still trading at 16% yield to maturity, but this will not last long).

The absolute debt of Teekay Corporation is not too burdensome in relation to their assets, and one can make an easy guess that given a bit of cash flow through their daughter entities, they will be in a much better position in a couple years to refinance than they are at present. They did manage to get another US$200 million of this 2020 debt off at a mild discount in mid-November 2015, which was crucial to bridging some cash requirements in 2016 and 2017. The US$593 million face value of unsecured debt maturing January 2020 is the majority of the corporation’s debt (noting the last US$200 million sold is not fungible with the present $393 million until a bureaucratic process to exchange them with original notes) – I’d expect sometime in 2017 to 2018 this debt will be trading above par value.

The debt can be redeemed anytime at the price of the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis, at the treasury yield plus 50 basis points, plus accrued and unpaid interest to the redemption date.

This is a very complex entity to analyze as there is a parent and three daughter units to go through (and realizing that Teekay Corporation’s consolidated statements are useless to read without dissecting the daughter entities – this took a lot of time to perform properly). I believe I’ve cherry-picked the best of it and have found a happy place to park some US currency. I still think it is trading at a very good value if you care to tag along.