We have explained the investment theory in Teekay LNG (TGP, Financial) (5.6% of the portfolio), engaging in the maritime transportation of liquified natural gas through long-term contracts, on numerous occasions since it commenced in 2017. In recent months, progress in the execution of the company has been notable and completely according to plan. The main progress was:
- Completion of the growth programme, which increased the size of the company by approximately 60%, all with very long-term contracts
- Beginning of accelerated debt repayment due to the substantial increase in cash generation once the growth phase has been concluded.
- An increased quarterly dividend from $0.14 per share to $0.19 in May 2019 (+35% rise), and more recently to $0.25 per share in May 2020 (+31% rise), a cumulative dividend rise of 78% in a little more than a year.
- The simplification of the corporate structure with the recent elimination of the “IDRs” (asymmetric remuneration mechanism in favour of the parent, which was not considered by the market).
Accordingly, Teekay LNG is nowadays a very different company in comparison with three years earlier, although the market has not yet reflected it in the valuation. Let us also recall that this company is very different to the remaining listed alternatives, since its long-term contracts, protected in volume and price, have not suffered the impact of COVID-19 in any way. While many companies on the market cut back or suspend dividends, Teekay LNG has the visibility and trust to continue to increase them, while it reduces its debt. Currently, its earnings per dividend were 9% with a PER of 4x.
With respect to Teekay Corp (TK) (2.9%), the parent of Teekay LNG, the investment theory has also progressed materially, not only due to everything that affects its participation in Teekay LNG (42% following the conversion of the IDRs into shares), but also due to the progressive divestment of its FPSO platforms, and also due to the significant improvement in the balance sheet of its investee Teekay Tankers (TNK). The latter has benefitted from the extraordinary increase in daily fleet rates. Our investment theory in crude tankers (also applicable for our investment in International Seaways) envisaged an improvement from such depressed levels in recent years, but the levels reached in the last three quarters have been extremely good, which enabled them to reduce their debt by over 20% in the first semester of the year. This accelerated deleveraging is occurring in the whole maritime sector, which for the time being remains very disciplined (they do not order new boats), which foretells a good business in the coming years, as we expected in our original theory. Even so, the sector continues to trade below the net asset value.
From Francisco Garcia Parames (Trades, Portfolio)' Cobas Asset Management's second-quarter 2020 shareholder letter.
