TK is trading for 2/3rds of today's value and less than half of its three year forward value.
·TK is a midstream
marine company currently trading at a 33% discount to its sum of the parts
(SOP) valuation of $65/share. We believe this SOP valuation has been depressed
due to the current credit crunch. There are also multiple levers that will produce
additional upside in the future, many of which are completely in the hands of
management and are high probability events. We believe a conservative outcome
is that TK increases its SOP valuation from $65 today to $100+/share within the
next 3 years.
·TK operates oil
and product tankers on the spot market, and shuttle tankers, FPSO’s, and LNG
tankers under long-term (5-20 year) agreements for fixed-rates. More than 50%
of TK’s value comes from long-term fixed-rate contracts.
believes that TK is not that different than a typical tanker company at the
whim of spot market rates. However, TK is half-way through a transformation
from an asset-heavy tanker company to an asset-light manager of tanker vessels
with superior returns on capital with less risk.
believes that spot rates will be under pressure in 2008 and 2009 due to an
overbuild of supply. The opposite has occurred in 2008 so far with spot rates
near all-time highs. The supply build is in anticipation of the 2010 deadline
for single-hull tankers to be taken out of the market which represents 15-20%
of the world fleet. This regulation will serve as a catalyst for spot rates as
it is not possible to replace the supply coming out of the market. Any softness
in rates should be temporary ahead of the deadline.
·The market does
not understand the potential value creation from TK’s general partnership
interests in its MLP’s. We believe these GP’s could be worth $25/share in 3-5
Key Investment Factors:
·Safe business – Over 50% of the value of TK is through their
fixed-fee businesses (offshore and LNG). In addition the spot business, while
volatile, has hard asset value through the second-hand market for tankers.
·Balance sheet – TK is conservatively levered now with $1.6 b of
debt backed by $4.0 b of cash or tanker assets. However, as TK continues to
drop down assets from parent into the MLP’s, the balance sheet will rapidly
delever allowing management to either repurchase undervalued shares or make
·Valuation – TK currently trades at a 33% discount to NAV of
which a large part is comprised of hard assets.
growth – Through a combination of
organic growth and drop downs of assets from parent into the MLP’s, TK’s
FCF/share will grow significantly in the next 3 years. We believe the GP values
alone could contribute an incremental $25/share of value to TK.
·Management – Excellent operators of the business proven through
their strategic outsourcing relationships with large integrated oil companies
and higher average day rates realized than industry average. In addition,
management is one of the sharpest financial engineering teams we have
encountered, evidenced by their shift to an asset-manager of tankers,
value-added acquisitions, and repurchase of ~15% of the outstanding shares over
the last 3 years at a significant discount to NAV. Management is also good
communicators of their business through presentations highlighting how they
think about operating strategy, capital allocation, and intrinsic value.
How It Plays Out:
continue to grow organically and drop-down assets into the MLP’s. TK will
delever the balance sheet, increase free cash flow through the GP interests,
and return excess capital to shareholders. There will also likely be additional
acquisitions that support TK’s growth strategy. Every acquisition to date has
been value creating.
Risks, What Would Make Us Wrong:
collapse – if spot rates collapsed
and dragged down asset values with it, this could significantly impact NAV.
interest rates – MLP’s cost of capital
would increase hurting both future growth in the distribution and the multiple
investors are willing to pay for that distribution.
risk – TK’s contracts are long-term
and fixed-rate, but if the counterparty had an issue there is not a liquid
market for LNG vessels and re-contracting could come at a discount to prior
rates. In addition when the contracts do roll-over there is additional
·Capital allocation – management is aggressive in growing the business.
So far have made excellent acquisitions. However, this was during a bull market
for all things energy so prospective deals may not work out.
·Terrorism/environmental – TK is insured for ~$1 b should a disaster occur
involving one of their vessels, but potential liability from an oil spill or
other unknown could be more than they are insured for.
·Taxation – tanker companies conduct most of their business
outside a specific country (i.e. on the water) and therefore are not subject to
taxation by countries. Should this tax regime change TK’s after-tax FCF would
decrease by whatever taxes they are forced to pay.
market, LNG market, and offshore market.
·Track MLP market.
Drop-downs of assets (Opco, Petrojarl FPSO's, oil tankers)