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Solid Trading Day for Oil Transport Superstar

Tuesday’s trading saw shares of Teekay Corporation (TK) skyrocket by more than 13.7% on heavy volume. The stock actually reached a new 52-week high during intraday trading.

Shares of the Bermuda-based international provider of crude oil and gas transportation services closed the day at $66.36, with nearly 4.7 million shares trading hands. That’s well above the company’s 30-day average of about 450,000 shares.

Yesterday’s close put Teekay’s market cap at more than $4.79 billion.

The catalyst for this price surge was an announcement publicizing the company’s intention to increase its annualized dividend to between $2.20 and $2.30 a share beginning in the first quarter of 2015.

The new dividend rate represents an increase of between 75% and 80% from its current annual dividend of $1.27. When implemented, it raises the company’s yield by approximately 100 basis points from its current level of 2.17%.

With the announcement, Deutsche Bank (DB) upgraded the stock to “Buy” from “Hold.” And it raised its price target to $90 from $68, based on the company’s “bold new dividend strategy.”

It’s a little late to the game, though.

We mentioned TK to our readers way back in March 2014. And I recommended Teekay in July 2014 over at Seeking Alpha.

The chart below shows why I continue to believe that TK shares could quite possibly surpass even Deutsche Bank’s optimistic outlook.

Tanker Rates on an Upswing: Suezmax Tanker Spot Rates

In July of this year, tanker rates reached their highest levels for any July since 2008, and showed improvement over Q2 2013 levels by $4,000 per day – an increase of 33% year over year.

Teekay Tankers (TNK), a subsidiary of Teekay Corporation, reports recent rate volatility as a positive signal of the stronger traffic rates, which typically begin in the fourth quarter.

This upward trend has already resulted in third-quarter bookings for spot revenue days to average $19,600 per day – up significantly from $16,100 per day in the Q2.

This trend is mainly attributable to an increase in long-haul movements from the Atlantic to the Pacific, the end of seasonal refinery maintenance, and vessel delays at U.S. gulf and Mediterranean ports.

When combined with the understanding that Teekay intends to link future dividend increases to cash flow growth at its two MLP subsidiaries, Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO), Teekay should experience a 20% growth rate in its dividend for the foreseeable future.

Year-to-date, TK stock has outpaced the broader market indices by returning an impressive 42.3% total return.

Teekay’s Q2 revenue grew to $452 million, an increase of 5% over the same period in 2013 – and compares to the industry average of 3% revenue growth for other transportation providers.

In addition to growing its revenue, Teekay is showing improvement in expanding its profit margins, too.

While the company’s debt-to-equity ratio remains higher than the industry average, the company is attempting to deleverage its balance sheet with the sale of two VLCCs for $154 million.

This sale provides the company with lower debt balances, as well as higher liquidity, which can be used to shore up its relatively poor quick ratio of 0.90 – which implies an inability to avoid short-term cash problems.

The stock has a beta of 1.58 and a short float of 2.3% with 1.55 days to cover.

As the industry continues to scrap older vessels – and the positive outlook for mid-sized tanker demand continues – Teekay should drive a sustained increase in crude tanker rates in the coming months and years.

And with the company’s strong industry fundamentals and aggressive search for new projects, a rising tide will take Teekay higher and higher.

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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