I wrote a column on May 20 describing a careful move back into some niche oil and oil services plays. I mentioned three securities in that column -- Ocean Rig UDW (ORIG), Teekay Offshore Partners (TOO), a master limited partnership, and Noble Energy (NBL). Since that column posted, Ocean Rig has kept on rockin', racking up a 62% gain since May 20, and Noble has gained 9%. Teekay Offshore had been the laggard, but today the shares are up 20% and as of this writing TOO is today's largest gainer among all NYSE stocks.
Why is Teekay Offshore doing so well today? Simply put, the company was able to raise capital.
Teekay is part of the Teekay family of companies that is headed by Teekay Corporation (TK) and also includes Teekay LNG Partners (TGP) and Teekay Tankers (TNK).
It's a very common business structure in shipping. Teekay Corporation acts a portfolio manager and project developer and the three "daughter" companies (that is Teekay's official nomenclature, not mine) act as asset owners holding ships that are sourced from the parent. The Teekay parent provides management for the daughter companies' vessels and receives dividends in return.
As oil prices plummeted, Teekay Offshore's key businesses -- floating production storage and offloading units (FPSOs), floating storage and offtake units (FSOs) and conventional tankers -- all suffered from pricing pressures. As a result, Teekay Ofshore cut its quarterly distribution from 56 cents to 11 cents in the fourth quarter. Even with that move, liquidity concerns continued and pressured TOO's valuation.
Those concerns were assuaged today as TOO announced that it had raised $200 million in equity capital via a $100 million offering of a new series of preferred shares and a $100 million offering of additional common units. Also, crucially, TOO was able to gain commitments of $400 million from its bank group and convince holders of its Norwegian kroner-denominated bonds to extend maturity on those bonds until the end of 2018.
So, TOO raised new capital and addressed intermediate liquidity concerns, and the market has responded favorably. With oil prices seemingly hitting a ceiling at the $50-a-barrel mark, it may be time to look to other sectors for quick profits.
Teekay Offshore's ability to access capital has been crucial for the company's success, and the next big mover in shipping likely will be a company where the market has mispriced its securities and raising capital is done through non-traditional methods.
I think the biggest candidate for such a move is Navios Maritime Holdings (NM). Much like the Teekay Group (via daughter company Teekay Tankers), Navios has strong representation in the attractive oil tanker space but also representation in a depressed space -- in Navios' case, dry bulk shipping.
Navios Holdings benefits from management fees paid to the parent by the asset-owning subs. Indeed, NM generated $54.8 million in such fees in the first quarter of 2016. So, Navios generates fees at the corporate level even when its corporate-owned dry bulk fleet is producing much lower revenues. Despite doubling from February's all-time low, dry bulk freight rates are still at depressed rates by historical standards.
So, Navios is going to need to shift its capital structure to harvest capital from the entities that are strong -- Navios Midstream Partners (NAP) and Navios Acquisition (NNA) -- and support the dry-bulk. vessel-owning entities -- Navios Holdings and Navios Partners (NMM) -- as access to capital in the dry bulk space is limited.
I believe Teekay has drawn the roadmap for Navios, and I would look for a similar, all-encompassing capital raise/restructuring from Navios sometime this summer.
In that event, Navios Holdings' preferred stocks -- trading at 16 cents (Series G) and 14 cents (Series H) on the dollar -- would move back up to levels more commensurate with the parent's steady cash flows owing to fee generation from related companies.
Navios' Series G preferred has performed well since I named the preferred my Real Money best pick in late January, and this week I have been buying the Series H preferred, as I see even more value there.
Navios preferred issues could double or triple and still not fairly reflect the parent company's valuation. Those are moves that I just can't afford to miss. So, if I'm early on NM-G and NM-H, I'm not worried. Eventually, value always wins out.