Seapeak: Preferred Shares Have Never Been So Stable (NYSE:SEAL.PA)

Introduction

I was a shareholder of Seapeak preferred stock (NYSE: SEAL.PA) (NYSE: SEAL.PB) for several years now. Teekay LNG Partners, the original issuer of the preferred stock, was taken private by Stonepeak, private joint-stock company. While I’m usually very wary when I see an individual firm take over a company and not exercise its right to pay out the preferred stock, almost every decision made by Stonepeak seems to be in the best interest of Seapeak LLC. And much to my surprise, the preferred shareholders are now in a better position than (ever) before because the private equity group has contributed more capital. Even common equity, which ranks below preferred stock. All relevant information will be referenced in this article can be found here. For the history of preferred stock, perhaps you could read this older one article on Seapeak Preferred Stock.

The full year results show an excellent level of preferential dividend coverage

Before we discuss the improved asset coverage ratio, I obviously also wanted to take a moment to look at how well preferred dividends are covered.

Seapeak’s total revenue in 2022 was just over $624 million, a 5% increase compared to fiscal 2021. That doesn’t mean Seapeak was able to translate higher revenue into higher net income, as operating expenses increased quite dramatically.

This was not a major issue and although revenue from ship operations looks quite disappointing at $177.3 million, which is more than a third below the 2021 result, note that the 2022 result includes a reduction of $54.4 million at the fair the value of their vessels. On an adjusted basis, operating income would have been $232 million, down slightly from 2021 despite higher operating expenses amid higher oil and fuel prices.

Seapeak also recorded income of $118 million from capital investments and its net finance costs were quite low. Although the company paid more than $137 million in interest expense, it also booked a $66 million gain on derivatives (as it hedged some of its interest rate risk) and posted a $25.5 million foreign exchange gain. The combination of all these items resulted in pre-tax income of $250 million and net income of $242 million. Note that while there was a gain on the derivative assets, there was also a significant impairment charge, so the net amount of non-recurring items boosted pre-tax income by only $35m, meaning it’s not very relevant in the bigger scheme of things. the things.

Net income was $241.6 million and net income attributable to Seapeak after deducting $17.5 million in net income attributable to non-controlling interests was $224 million. And as you can see in the income statement above, only $25.6 million was owed to preferred shareholders, meaning Seapeak only needed 11% of its underlying net income to cover the preferred dividends. This is very decent and means that the preferred dividend coverage ratio is almost 900%. Very convenient situation to find.

The level of asset coverage has increased

The main risk when a private equity group takes a company private is that they decide and could just add a lot of debt to the balance sheet and use the proceeds from the debt issuance to pay extraordinary dividends to themselves. “Optimizing” or “right-sizing” a balance sheet with only one goal: Make sure the equity pool is doing well.

This means that in most situations the interests of the preferred shareholders and the private equity owner of a group are not aligned. However, Stonepeak had a reputation for being honest and forthright, and seeing as how the PE group didn’t try to get the Seapeak group out quickly, I’m increasingly convinced that Stonepeak just wants to do the right thing (and seeing as Seapeak continues to file financial statements with the SEC is a very important element here).

There was one item in the fourth quarter of 2022 that convinced me even more that this was indeed the case. Footnote 21 is the last footnote in the SEC filing, but it confirms that after investing $129 million in common equity in December 2022, Stonepeak has made an additional contribution of approximately $86 million. This means that the equity group adds more common equity to the balance sheet, which ranks lower than preferred equity.

This means that the preferred shareholders are in an even better position than a year ago. As of the end of 2022, preferred equity totaled $282 million on a total of $2.28 billion in equity on the balance sheet. This means that about $2 billion of equity is ranked junior to preferred stock for an asset coverage ratio of over 800%. The additional cash injection of almost $90 million in Q1 2023 will only increase this ratio. This makes the preferred shares safer and again emphasizes that Stonepeak really wants to do things right.

Interestingly, Seapeak has begun to buy back some of its preferred stock on the open market. Smart because it can set its own pace while collecting the preferred shares at a discount to their base value of $25/share. According to the footnotes, Seapeak repurchased just over 38,000 Series A preferred shares and just under 73,000 Series B preferred shares for a total of 110,000 shares, which will save the company about $250,000 in preferred dividends on an annual basis.

Investment thesis

Of course, the buyback of about 1% of the number of preferred shares can be seen as insignificant. But it shows that the company is still interested in buying back its shares at a discount to the market price, and with both (SEAL.PA) and (SEAL.PB) still trading at a discount to their fundamental values, I expect Seapeak to continue repurchasing the preferred shares in the open market.

I have a long position in both series of Seapeak preferred stock and would be interested in adding to that position at a discount to principal and only until Stonepeak, the private equity partner, gets it right.