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Shares of offshore shipping giant Teekay Corporation (NYSE: TK) are down 12.9% at 3:45 p.m. EST on January 24, following two announcements it made. The first announcement is that it had priced a public offering for 10 million shares of newly issued Teekay stock at $9.75 per share. Second, the company announced it had priced its private offering of $125 million in 5% convertible notes, which it was making available to qualified institutional buyers. The initial purchasers were also granted the right to purchase up to $25 million in aggregate notes.
Between these two announcements, Teekay's current shareholders will see a significant amount of dilution. The public offering alone will increase Teekay's shares outstanding by 11%, meaning existing investors immediately lose that percentage of their equity in the company without doing anything. Coming into today's trading, Teekay's stock price was assured to lose some value since shares closed trading on January 23 nearly $1 above the $9.75 per share at which the company priced its share offering.
There's more potential dilution coming down the road from the convertible notes issuance. The company priced the conversion at what works out to be $11.70 per share when they mature in 2023. The good news is that's five years down the road, giving the company significant time to improve its operations and for the offshore market to recover from a rough few years.
The risk, of course, is that another downturn happens before then, or Teekay faces further struggles that force it to convert that debt at a lower price, increasing the number of shares it must issue. That's the downside if things aren't significantly improved in a few years.
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It's been a hard few years for Teekay and its subsidiaries, which have seen their earnings and market value fall substantially during the oil and gas downturn; something that has been exacerbated because of a number of maritime-specific issues, including a glut of working vessels putting pressure on pricing and making it harder to keep ships working. But the company has substantially reduced its debt over the past year -- though partly by selling stock and diluting shareholders -- and it still generates solid operating cash flows.
But after several years of aggressive expansion, and then the recent industry downturn, Teekay hasn't produced positive free cash since 2011. Until the company can show the ability to live within its cash flow, investors should remain cautious.
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