Teekay Offshore Dodges A Bullet – Seeking Alpha

(Updated 07/27/17 7:15 PM ET)

Teekay Corporation (TK), Teekay Offshore (TOO), and Brookfield Business Partners (BBU) announced a $640 equity injection to Teekay Offshore from the other two. This should stabilize Teekay Offshore finances enough to relieve any anxiety about a potentially worse solution. On the other hand, the large equity investment in Teekay Offshore clearly demonstrates how dire the financial situation had become. If the lenders were willing to solve the problem, they would have long ago. The equity was needed to meet additional prepayment demands as well as start the order process for more shuttles. Clearly the lenders were not happy and were probably concerned before the large cash injection.

Teekay had about 150 million common units outstanding before the investment. The $640 million investment at $2.50 per share means that there will be another 256 million units issued. Brookfield will receive 244 million for their $610 million portion and Teekay will receive 12 million shares for its $30 million investment in Teekay Offshore. Another 65 million warrants distributed proportionately between Teekay Corporation and Brookfield brings the total shares outstanding to 471 million diluted shares outstanding. That is a lot of necessary dilution to clean up the mess that was created by the parent company.

Brookfield also will obtain a 49% interest in the general partner with an option to acquire another 2%. This is a huge vote of no confidence in the management abilities of the current general partner. If Brookfield has more faith in the general partner, then there would be no need to try and obtain control. In addition, Brookfield will also obtain 4 seats on the board. It is very clear that Brookfield will be actively involved in the management of Teekay Offshore Partners. What is interesting is that major shareholders chose to not get involved so far. So how this figures into the future will be interesting.

The lenders for their part wanted more cash to extend the loan mandatory prepayment of the Arendal Spirit about a year to September 30, 2018. This gives Teekay Offshore more time to find a suitable contract for this ship. In fact, Teekay Offshore Partners now has the additional cash to handle the cost overruns without additional loans from the lenders. In the future, Teekay Offshore is going to be run a little more conservatively with a cash cushion. Also expect Brookfield to review current profit margins by ship and find ways to improve those margins.

Investors will have to wait and see if the additional upfront cash becomes required throughout the corporation. Clearly, Teekay Corporation nearly let things get almost beyond fixable. The usual penalty for that is either more interest, larger down payments, or both in the future.

Teekay Corporation was also the beneficiary of some of the investment process. The parent company sold $200 million inter-company loans to Brookfield for $140 million and received 11.4 million warrants that went to Brookfield. The whole transaction relieves Teekay Corporation of a lot of liability and allows the corporation to concentrate on its future. The parent corporation got off much better than it deserved.

However, Teekay Corporation appears likely to lose control of Teekay Offshore Partners. That in itself is a significant "slap in the face". The distress sale of the bonds will result in a $60 million charge. It is clearly a distressed sale within the meaning of the financial ratings companies. So the exchange may have some future financing implications for the Teekay Corporation and its entities. Teekay Corporation did receive a much needed cash injection from this transaction. But for the time being, the parent company is still cash flow negative until that bright future arrives. As shown by the $30 million investment in Teekay Offshore, clearly the parent company could not rescue Teekay Offshore by itself.

But this could have been far worse for Teekay Corporation. Letting debt problems go as long as they did is very dangerous. Now if that promised future from the other subsidiaries is still available, then all this may become a bad memory down the road. But if management slips up again, then Brookfield is in a very good position to take another bite. Brookfield obviously sees some assets and a future that it likes. The big question for shareholders will be if they get to share in that future with an investor like Brookfield around. Now that Brookfield has warrants, it may attempt to acquire Teekay Parent company at some point.

Teekay Offshore Partners will probably have a solid and much less risky future with the Brookfield involvement. An actual acquisition of the 2% to obtain control of the general partner would probably be greeted as a positive event by the market. The common distribution was reduced. Two classes of preferred will be redeemed and retired. The other two classes will receive cash dividends and are probably much safer investments than they were before. But the future of the common units is much better than it was. A company such as Brookfield generally knows how to use leverage for decent gains. So when the dust clears, all the refinancing is complete, and all the facts become known, the Teekay Offshore units will probably be worth a look.

Disclaimer: I am not a registered investment advisor and this article is not advice to buy or sell stock in any company. The investor needs to do his own independent investigation that includes reading the company governmental filings and press releases, as well as anything else relevant to determining if this company fits the investor's risk profile.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Teekay Offshore Dodges A Bullet - Seeking Alpha