What: The maritime shipping industry is a hornet's nest today, with the announcement that Teekay Corporation (TK -0.55%), Teekay LNG Partners L.P. (TGP), and Teekay Offshore Partners L.P. (TOO) would all cut their dividends by as much as 90% going forward. The reverberations of this move are hitting other shippers' stocks as well, with GasLog Ltd (NYSE: GLOG) and its MLP GasLog Partners LP (NYSE: GLOP), along with Golar LNG Limited (USA) (GLNG -0.82%) and its MLP Golar LNG Partners LP (GMLP) all down more than 10% as well:
So what: Teekay and its partnerships are all feeling the pinch of shifting priorities in the oil and gas space. Like Golar LNG and GasLog, Teekay and its MLPs have invested in aggressive growth as global demand for natural gas, oil, and natural gas liquids like LPG is set to grow.
But now, the glut of global oil is wreaking havoc. Capital markets are weak, and companies are being forced to choose between paying a fat dividend or funding growth. Needless to say, the Teekay companies have made that choice, gutting their dividends. Teekay CEO Peter Evenson put it this way:
Cash flows generated by both Teekay Offshore and Teekay LNG, which largely underpin Teekay Corporation's dividend payment, remain stable and growing, supported by large and well-diversified portfolios of fee-based contracts with blue-chip counterparties. However, Teekay Offshore and Teekay LNG require capital to fund their growth and there is currently a dislocation in the capital markets relative to the underlying stability of our MLPs' businesses. As a result, their cost of equity has increased to the point where it is currently not an economically attractive source of growth capital.
In other words, debt has become too expensive. And with the dividend yields Teekay and its two MLPs were paying, the effective cost of capital from a stock offering would have been outrageous.
So here we are.
Now what: Frankly, the sell-off may be overdone, since the dividend cut will provide more than enough breathing room for Teekay, Teekay LNG, and Teekay Offshore to move forward with their capital plans. The real concern, however, is how much future demand there will be for the new vessels they are building in coming years. In other words, it could be a buying opportunity for value reasons, but it may be best to let things settle first.
This is especially true when it comes to GasLog and Golar LNG, since those companies' stocks are down wholly on Teekay's announcement, and no announced dividend cuts by those companies as of this writing.
But that could change very quickly. It's clear, based on Teekay's situation, that capital is getting tight in the industry, and the move by Teekay could provide exactly the cover that GasLog and Golar LNG management needed to slash their own payments. The market's reaction today indicates that a lot of investors think that's the case, anyhow.
In other words, there could still be more downside even after today, especially for GasLog and Golar LNG, depending on whether or not their managements decide to cut their distributions.
Bottom line? It's probably worth letting the storm pass, at least for now. There could be real value in this segment, but it's likely to be choppy waters until things become more clear with Golar's and GasLog's dividend policy. Stay tuned.
