Last week, Teekay LNG Partners (NYSE:TGP) announced it would sell 2.8 million units -- MLP-speak for shares -- in order to fund the first $95 million payment for six newbuild LNG tankers. The share offering will result in a 4% dilution for current unit holders, and covers less than 5% of the $2.1 billion cost of the tankers. How much further dilution will newbuilds cost? Teekay LNG Partners currently has 19 vessels on order, and while these new ships will significantly increase its capacity, and therefore earnings potential, they will come at the cost of further dilution and debt.
Is Teekay LNG Partners the best investment in the Teekay Corporation (NYSE:TK) family, or is Teekay Offshore Partners (NYSE:TOO) -- the best performer over the past five years -- a better investment today? Let's take a closer look at what's going on with the Teekay family.
Potential for LNG shipping is enormous
This is at the heart of the Teekay LNG Partners story. Natural gas locked inside shale formations all over the world -- as well as gas reserves in harsher climates like the arctic -- are being developed today, based on growing natural gas demand and new technologies that make these reserves cost-effective to develop.
The six ships that were most recently ordered will operate within the 50/50 joint venture with China LNG Shipping, giving Teekay LNG Partners access to the Chinese market, which is experiencing enormous growth in demand for natural gas. This growth extends into every segment of the Chinese economy: as a transport fuel due to its lower levels of pollutants versus diesel; to generate electricity; and as a feedstock for various industrial manufacturing needs. Additionally, these six ships will be operating in some of the harshest and coldest climates LNG ships work in: the Yamal Peninsula in Siberia:
These ships will all be equipped -- both fore and aft -- with 2.1 meter icebreaking capability. Considering that the Yamal Peninsula -- which is home to, by some accounts, the world's largest natural gas reserves -- shares a latitude with Greenland, these vessels will use that capability. In short, access to both the largest growth market for natural gas -- China -- and the world's largest natural gas reserve in the Yamal Peninsula makes these six vessels critically important to Teekay LNG Partners.
Don't ignore Teekay Offshore Partners
There is huge interest in natural gas shipping right now, and rightly so with so many export facilities coming online globally over the next five years. However, the worldwide energy story is still about oil, and Teekay Offshore Partners is a key contributor in the storage and transportation of oil from offshore production sites. As production in deepwater increases, operators like Teekay Offshore will become increasingly important due to their ability to replicate a pipeline and move crude oil from these deepwater wells to onshore pipelines for processing.
Case in point: Teekay Offshore Partners' fleet of 34 shuttle tankers is more than half of the entire industry supply, and these vessels operate under long-term (three- to ten-year) contracts with oil producers. Further, consider that much of the offshore oil exploration and production over the next decade will take place in deepwater environments and more remote locations -- putting the supply even further from onshore pipelines -- and Teekay Offshore Partners' services will remain in strong demand.
Debt versus opportunity
Here is both the current long-term debt and recent revenues for all of the Teekay Corporation companies:
The point of this chart? Teekay LNG Partners' 19 ships on order will increase its fleet size by 40% over the next four years, while Teekay Offshore Partners, Teekay Corporation, and Teekay Tankers combined only have five new vessels on order. These new vessels will generate a lot of revenue and income, but also a lot of debt. Chances are it will also result in more dilution:
Final thoughts: Income and growth potential
While Teekay LNG Partners has a substantial growth opportunity in front of it versus the smaller growth for Teekay Offshore, that growth will come at the cost of increased debt and dilution, much as Teekay Offshore investors have seen as it has built up its fleet of shuttle tankers and FPSO vessels.
Will that dilution lead to underwhelming returns? Honestly it's hard to say, beyond looking at the track record of management as being pretty solid. Teekay Offshore might not have the same growth potential, but its market share in shuttle tankers and increased demand for deepwater oil production support vessels should lead to continued regular increases in the dividend, which already yields around 6% today.
Which makes sense for your portfolio? That's a question you have to answer for yourself based on your needs and objectives.
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Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.