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3 Biggest Challenges Facing Teekay Corporation: Shipping ain't easy

3 Biggest Challenges Facing Teekay Corporation
February 28, 2018

Things haven't been easy for the global shipping industry in recent years, although much of the blame lays with the industry itself.

As a new report from Standard & Poor's Global Ratings stated rather bluntly, the shipping industry is "renowned for poor supply discipline." That's a nice way of noting that fleet managers have historically rushed to order new ships, called newbuildings, seemingly every time market fundamentals turn bullish. That practice has historically backfired by creating a glut of capacity -- and it's exactly what created the current environment of atrocious daily rates and deep losses.

The good news is that better days might be around the corner at last. Newbuilding deliveries will fall in 2018 after a few years of steadily increasing, which should finally allow a long-awaited recovery to gain traction. While that could help to create momentum for shipping leader Teekay Corporation (NYSE: TK), there are still a few obstacles to contend with. Here are the three biggest challenges facing the company.
1. Global glut of shipping vessels

While it's true that 2018 will see fewer newbuildings delivered, the industry will still be reeling from oversupply for at least a few more quarters, and probably years, thanks to an influx of deliveries in previous years. The trend has occurred in nearly all classes of ship. For instance, the global Suezmax fleet ended 2017 with 498 vessels, including 56 newbuildings that entered service during the year. That will fall to 33 new vessels delivered this year and just seven in 2019.

The glut of tanker capacity will continue to sting Teekay Corporation through Teekay Tankers, one of two publicly traded companies whose operations are consolidated onto its income statement. The daughter company has continued to be held hostage by weak tanker rates, which has cut its share price in half in the past year alone. It does have the most room for improvement among the parent company's holdings, but investors shouldn't expect an overnight recovery.

That said, not all newbuilding deliveries are accompanied by misery. Teekay LNG Partners LP figures to be a silver lining for Teekay Corporation in 2018 and beyond, which will certainly help shareholders cope with what may very well be a slow recovery for Teekay Tankers. Why?

The global demand for liquefied natural gas (LNG) has proved difficult to satiate. So although Teekay LNG welcomed three wholly owned carriers and three partially owned carriers into its fleet in the final quarter of 2017, they all immediately entered service in long-term charter contracts with global energy leaders. Plus, energy prices are one factor that determines the shipping rate for the new carriers, and given their recent rise, investors should see steady growth from the expanding fleet over time.

2. Pace of recovery in offshore energy

The third company that contributes to Teekay Corporation's financial results is Teekay Offshore Partners LP, although its results are no longer consolidated. Instead, it contributes through the equity method, meaning only a portion of profits and losses flow through to the parent company's income statement.

Unfortunately, profits have been difficult to come by in recent years, as the offshore energy industry suffered some of the worst fallout from the collapse in crude oil prices in 2014. And although there are signs that energy companies are once again exploring offshore opportunities, it could take years to repair the damage done by three years of steep underinvestment. Therefore, the pace of the recovery in offshore energy will remain a challenge for Teekay Corporation.

But once again, there's a silver lining for investors. Teekay Offshore had a difficult 2017 as it reorganized its affairs and cleaned up its balance sheet, but it ended on a relative high note. In late 2017 and early 2018, several new vessels entered service or will soon enter service as part of important growth projects, namely in Canada and the bountiful offshore deposits in Brazil. As the new additions to the fleet ramp up operations this year, income and cash flow should stabilize, which promises to provide a shot in the arm for Teekay Corporation.

3. Business model disruption

If you thought only walks around in the nightmares of retail companies, think again. The online retailer has made its ambitions in global shipping, mostly for the sake of efficiency in its core business, well known, although many in the shipping industry fear that will be accompanied by the company's trademarked approach: disruption.

The plan, called the "Global Supply Chain by Amazon," outlines a path toward a shipping and logistics unit. While having Amazon move into any industry is a scary reality for any incumbent, that's especially true for the relatively poorly managed shipping industry. Whether disruption arrives in the form of drone ships, increased reliance on digital technologies, or teleportation machines isn't really the point. Cutting out the middleman, in this case cargo shipping fleet managers such as Teekay Corporation, is the future investors might want to prepare for.

By now, you should know that there's a silver lining here, too. Teekay Corporation and its daughter companies appear to be turning a corner in 2018. And while it's easy to imagine how Amazon could steamroll historically inefficient shippers, it seems unlikely for it to wade into energy trade or offshore energy shuttles. So even in a worst case disruption scenario, the parent company can double down on those areas to survive.

Shipping ain't easy

While shipping leaders such as Teekay Corporation appear to be on the right path, they still face challenges in the year and years ahead. Its daughter companies are sorting through their own issues that will take time to work out. Meanwhile, Amazon has fired off warning shots at the entire industry, however distant the threat may be. Individual investors eyeing shipping stocks for value may be on to something, but it's important to remember that the long-awaited recovery won't occur overnight.

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