Friday, December 14, 2007

Teekay's Spin-Offs

Teekay Tankers' Taste of Success
Ruthie Ackerman

Teekay Corp. thinks the whole is less than the sum of its parts.

The energy-based maritime conglomerate has spun off yet another one of its major operations. On its first day of trading Thursday, shares in Teekay Tankers (nyse: TNK) gained 4.0%, or 78 cents, to $20.28. Its initial public offering price of $19.50 per share was at the high end of the anticipated range.

The offering was of a 40% interest in Teekay Tankers; parent Teekay Corp. (nyse: TK) is retaining 60%.

Teekay also has spun off Teekay Offshore Partners (nyse: TOO), which specializes in fleets for storage of oil for offshore units, and Teekay LNG Partners (nyse: TGP), which operates vessels that carry liquified natural gas.

Since it began its spin-off program in May 2005, Teekay stock is up 28.5%. Teekay LNG is up 33.0% since it came public in May 2005, and Teekay Offshore has risen 20.2% since its debut in December 2006. By contrast, an index of energy-transport companies compiled by Revere Data has increased only about 11% since May 2005.

Charles W. Rupinski, an analyst at Maxim Group, said Teekay's tanker business is its most volatile one, and management probably thought it was dragging down the valuation of the company as a whole.

Even though spot rates are very high right now and Teekay has a lot of spot exposure, going forward the tanker business is facing many challenges and investors are likely to be cautious, Rupinski said.

Indeed, although the offering did well, investors put a significantly lower value on the spin-off than the parent. Using the pro forma earnings for last year provided by the Teekay Tankers offering document, the spin-off was valued at 9.2 times last year's income while the parent fetched 12.7 times last year's reported profit. The spin-off is planning to return a high proportion of its earnings to shareholders by way of dividends.

Teekay Tankers is getting nine double-hull Aframax-class tankers, which will be used for spot charters and short- or medium-term fixed-rate time-charter contracts. At the end of June, the ships, whose name derives from the acronym for average freight rate assessment and which are smaller than the oil supertankers that cannot make it into some harbors and canals, were worth about $275 million

Teekay Tankers raised about $180.8 million from the IPO after expenses and commissions. The proceeds will be used to partially repay Teekay for the inital fleet.

In addition, Teekay will give Teekay Tankers the opportunity to purchase up to to four Suez-max class tankers within 18 months. These ships are built to fit through the Suez Canal.

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