2023-03-22 20:52:53 ET
Summary
- Teekay Corporation's shares rally to new multi-year highs after the company accelerated share buybacks over a couple of weeks.
- In recent months, the company has repurchased 6.3% of its outstanding common stock at an average price of $4.64 per share for a total of $30 million.
- In addition, the Board of Directors authorized a new, up to $30 million share repurchase authorization.
- Increased buyback activity is fueling speculation about a potential near-term dividend announcement by subsidiary Teekay Tankers.
- While the company's discount to net asset value has narrowed substantially, I am keeping my "Buy" rating on the shares due to the potential near-term catalyst and ongoing strong tanker market fundamentals.
Note: I have covered Teekay Corporation ( TK ) previously, so investors should view this as an update to my earlier articles on the company.
On Wednesday, Teekay Corporation's ("Teekay") shares rallied to new multi-year highs after the company surprisingly announced the completion of a $30 million share repurchase program authorized by the Board of Directors seven months ago.
Under the program, the Company has repurchased 6.45 million common shares, or approximately 6.3% of the outstanding common shares immediately prior to commencement of the program in August 2022, for a total of $30 million, which equates to an average price of $4.64 per share.
Remember, at the time of the company's fourth quarter and full-year 2022 report in mid-February, Teekay had repurchased approximately 4.5 million shares at an average price of $4.16 per share.
Over the past month, the company has bought back another 1.95 million shares at an average price of $5.78.
In aggregate, I would estimate total Q1 repurchases to date approaching three million shares.
Even better, Teekay announced a new $30 million share repurchase program:
In addition, the Company’s Board of Directors has authorized a new share repurchase program for the repurchase of up to $30 million of the Company’s outstanding common shares. Under the program, repurchases can be made from time to time in the open market, through privately-negotiated transactions and by any other means permitted under the rules of the U.S. Securities and Exchange Commission, in each case at times and prices considered appropriate by the Company. The timing of any purchases and the exact number of shares to be purchased under the program will be subject to the discretion of the Company and upon market conditions and other factors. The Company intends to make all open market repurchases under the plan in accordance with Rule 10b-18 of the U.S. Securities Exchange Act of 1934, as amended.
The increased buyback pace despite the recent share price appreciation should be of particular interest for shareholders of the company's subsidiary and main asset, Teekay Tankers ( TNK ).
Remember, Russia's assault on Ukraine has reshaped the tanker markets as sanctions have led to trade recalibration towards longer distances with refinery dislocation adding further to ton-miles.
As a result, Teekay Tankers is generating decent amounts of cash with the company's annualized free cash flow yield exceeding 50% at current charter rate levels.
In Q4 alone, Teekay Tankers generated $164 million of free cash flow and based on the company's preliminary first quarter daily time charter equivalent ("TCE") rates provided in last month's earnings presentation , Q1 cash generation might be even better.
Given these eye-catching numbers and ongoing strong tanker market fundamentals, on the Q4 conference call , Teekay Tankers' management was pressured by analysts to provide more details on the company's future capital allocation plans.
Unfortunately, management remained hesitant to commit to share repurchases or dividends (emphasis added by author):
We now need to look at 2023, and we started the year off extremely well, even better on the Aframaxes in Q4. So the debt is coming down very quickly. And we do recognize that in this position, with this level of cash generation and with a forward view that the market should remain strong, maybe, perhaps not at these levels, but certainly strong throughout the year, that does afford us optionality other than just looking at balance sheet strength.
So as we sit down with our Board, we will be talking about 2023 and what we do with the cash. Part of that discussion will be around the third leg or the third phase that I think Stewart has spoken about on previous call last year about building that financial capacity to be able to do some significant fleet renewal when the opportunity arises. But I think we also can talk about other options. So that is certainly something that we plan to do.
Later in the Q&A-session, management made clear that the company is not solely focusing on fleet renewal, as suspected by a number of market participants for quite some time now (emphasis added by author):
I think we have to be realistic. Teekay, like any ship owning company, has assets with finite lives. And as we generate income, we have to be prudent about reserving some of our earnings to invest in renewing our fleet and renewing our business. But we're fully aware that a capital allocation strategy or plan, which we do talk to our Board about every meeting, can include other options. And as we continue to generate the levels of cash flow that we've seen in the fourth quarter, and here so far in the first quarter, it does give us the options to look at other avenues .
And we are fully aware that we have shareholders that do like capital return, and there's various forms of doing that. So it allows for a very healthy open, robust discussion with the Board about what the best approach is, but we're not fixed that all of it has to go in one direction or another.
While management is certainly correct regarding the requirement to invest in fleet renewal over time, the company's options are basically limited to ordering newbuilds at this point as second hand vessel prices remain near all-time highs. But given the level of inflation witnessed in recent quarters, newbuilding prices are also up by approximately 20% to 30% from pre-pandemic levels.
With net debt decreasing rapidly and limited options for near-term fleet renewal, I would expect Teekay Tankers' board of directors to authorize the return of capital to shareholders in the very near future.
And with parent Teekay aggressively buying back its shares in the open market, I wouldn't be surprised to see Teekay Tankers initiating a variable quarterly dividend in the very near future.
Based on the company's cash generation in Q4 and assuming a dividend of $1.50 per share, Teekay Tankers would pay out just 30% of its quarterly free cash flow while parent Teekay would receive $14.5 million in dividends under this scenario.
That said, even after increasing the pace of share repurchases and repaying $21.2 million in remaining convertible debt in January, Teekay Corporation retains more than $300 million in cash with basically no debt.
Since my last update on Teekay in September, the discount to estimated net asset value ("NAV") has narrowed from almost 40% to approximately 16% as of the time of this writing due to ongoing share buyback activity and market participants having started to take notice of the company's increasingly valuable stake in Teekay Tankers.
Bottom Line
Despite the narrowing discount to estimated net asset value, Teekay Corporation recently increased the pace of share buybacks and with a new, up to $30 million repurchase authorization being put in place by the board of directors, aggressive buyback activity might very well continue, thus fueling speculation about a potential near-term dividend announcement by subsidiary Teekay Tankers which would almost certainly provide another lift to both companies' shares.
Given the above-discussed near-term catalyst and ongoing healthy tanker market fundamentals, I am keeping my "Buy" rating on Teekay Corporation's shares for now.
For further details see:
Teekay Corp.: Aggressive Share Buybacks Are Fueling Speculation About A Teekay Tankers Dividend