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Teekay Offshore: 10.7% Yield Preferred Shares, On Sale or In Danger?

The S&P 500 hit record highs this past week, as growth and tech stocks continue their impressive velocity higher. However, not all stocks are flying high, and certain value opportunities are increasingly interesting. This week’s Blue Harbinger Weekly provides a quick review of the performance of our holdings, as well as our opinion on the 10.7% yielding preferred shares of Teekay Offshore (TOO.B) which are currently trading at a discounted price of $19.82 per share.

For starters, here is a look at the recent performance of major market indexes and sectors.

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Tech and growth stocks continue to lead the way higher, which has benefited our Facebook and Paylocity holdings, in particular over the past week (Facebook also announce continued positive earnings, user growth, and reserves related to information privacy concerns). Specifically, here is a look at the recent performance of our current portfolio holdings (the strategies continue to post impressive gains).

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However, if your looking for high yield opportunities with discounted prices, you might consider a few of the names on the following list of preferred stocks (many of them have “call prices” of $25 and currently trade below those prices). For example, consider the 10.7% yield of Teekay Offshore preferred shares (TOO.B), which currently trade at a discounted price of $19.82.

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Teekay Offshore (TOO.B), Yield 10.7%

We acknowledge these shares are higher risk than a savings account or an S&P 500 ETF, but they’re also attractive and we continue to own them. As a reminder, Teekay Offshore provides marine transportation, oil production, storage, long-distance towing and offshore installation for the oil industry. Also as a reminder, here is some background and a few reasons why we like these shares.

For starters, this is an industry that hit major challenges a few years ago (late 2014 and 2015) when the price of oil fell from around $120 to less than $30 per barrel; this decline created serious challenges for the industry. However, marine transportation in the oil industry isn’t going away, and Teekay remains a leader in the space.

Teekay Offshore is a good business with an improving balance sheet—thanks in large part to deep pocketed investor Brookfield which has relatively recently taken a majority ownership position in the business. This helped improve the credit profile of Teekay right off the bat, and it continues to improve as the group works to actively deleverage. Specifically, they’re paying down debt, which has been challenging for common shareholders but its good for bondholders and preferred stock owners, in our view. Further, Teekay Offshore continues to pay a dividend on the common shares which provides even more cushion and safety for the preferred shares because preferreds are higher in the capital structure than common shares, and these particular preferred shares are cumulative (i.e. if they miss a payment ever, they’re supposed to make it up later). Here is more about these preferred shares from QuantumOnline:

“Teekay Offshore Partners, L.P., 8.50% Series B Cumulative Redeemable Preferred Units, liquidation preference $25 per unit, redeemable at the issuer's option on or after 4/20/2020 at $25 per unit plus accrued and unpaid dividends, and with no stated maturity. Cumulative distributions of 8.50% per annum ($2.125 per annum or $0.53125 per quarter) will be paid quarterly on 2/15, 5/15, 8/15 & 11/15 to holders of record on the record date that will be the fifth business day immediately preceding the payment date (NOTE: the ex-dividend date is at least one business day prior to the record date). Dividends paid by the preferred units are eligible for a preferential income tax rate of 15% to a maximum of 20% depending on the holder's tax bracket (and under normal holding restrictions) but, since they are issued by a foreign company, are NOT eligible for the dividends received deduction for corporate holders (see page S-84 of the prospectus for further information). This security was not rated by Moody’s or S&P at the time of its IPO. In regard to the payment of dividends and upon liquidation, the preferred shares rank junior to the company's senior debt, equally with other preferreds of the company, and senior to the common shares of the company. See the IPO prospectus for further information on the preferred stock by clicking on the ‘Link to IPO Prospectus’ provided below.”

From a valuation standpoint, the shares are relatively inexpensive (see more detail in the following table), but we continue to believe Teekay has plenty of cash flow to support them, and considering they’re callable starting in 2020, they may get redeemed at par ($25) in 2020 which would be a quick price gain for investors—in addition to the big dividend payments.

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Our Teekay Bottom Line:

Teekay is expected to announce quarterly earnings this week on April 30th, so that could be a significant event for the share price, depending on the news. However, in a nutshell, we like these preferred shares (TOO.B), and we continue to believe they are an attractive allocation to consider for a larger diversified income-focused investment portfolio. Long TOO.B.

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