Seapeak: The 8.9% Yielding Preferred Shares Remain Attractive (NYSE:SEAL.PR.A)

Introduction

At the end of 2023, Seapeak owned an “average” 21 LNG carriers and 21 NGL carriers on a consolidated basis throughout the year. I was mainly interested in the LNG vessels as the sole reason to have a long position in Teekay LNG Partners. I also owned the preferred shares and after Teekay LNG was taken private by Stonepeak and rebranded into Seapeak, the preferred shares remained outstanding. I still have a long position in both issues and the quarterly preferred dividends (which are not subject to a dividend withholding tax) provide a nice boost to my cash flow. For all older articles on Seapeak, please follow this link.

The financial performance remains robust and the preferred dividends enjoy excellent coverage ratios

As Teekay LNG Partners was taken private and rebranded into Seapeak, I’m only interested in two things: Can Seapeak comfortably pay its preferred dividends, and does the balance sheet provide a margin of safety?

2023 was a good year for Seapeak. The company reported total revenue of almost $727M, resulting in an income from vessel operations of approximately $315M. That’s almost 80% higher than the $177M income from vessel operations reported in 2022 but the majority of the improvement could be explained by the gain on the sale of vessels to the tune of $28M in FY 2023 compared to a $54M loss in 2022. The difference of in excess of $80M represents I excess of half of the higher income from vessel operations. The other improvement is just an organic improvement thanks to the $100M in additional revenue, offset by an increase in operating and voyage expenses of just $27M.

On top of that, Seapeak reported a higher contribution from equity investments, and although the interest expenses increased, the pre-tax income jumped to $328M resulting in a net profit of $318M. Of that amount, $13.2M was attributable to non-controlling interests which means there was in excess of $304M attributable to Seapeak. And after covering almost $25M in preferred dividends, the net income attributable to the common shareholders of Seapeak was almost $280M.

This means the preferred dividends are very well covered: Seapeak needed less than 9% of its attributable net income to cover the preferred dividends. Even if you’d ignore the $28M gain on the sale of vessels, the payout ratio was still less than 10%.

At the end of 2023, Seapeak’s total equity on the balance sheet increased to 2.58B, of which $278M was classified as preferred equity (represented by 11.53 million units). Applying the $25 call value of the preferred shares, the total preferred equity was just under $290M which means there was approximately $2.3B in common equity which ranks junior to the preferred shares. That’s an improvement from the less than $2B in common equity at the end of 2022. The stronger equity position was partially thanks to a $86M cash injection by the private equity partner, partially offset by a $50M dividend.

The terms of the A and B preferred shares

As explained in my previous articles, the company still has two series of preferred shares outstanding after the private equity group elected to not call the preferred equity when it acquired Teekay LNG Partners. The terms of the preferred shares remain unchanged from when the previous article was published.

The A-shares (NYSE:SEAL.PR.A) offer a 9% dividend yield on the $25 principal value (which means it pays a preferred dividend of $2.25 per preferred share per year, payable in quarterly installments) and can be called at any time. The Series A is currently trading at $25.10, and this share price of just over par means the current yield is approximately 8.95%.

Meanwhile, Seapeak’s Series B (NYSE:SEAL.PR.B) preferred shares also remain outstanding. These preferred shares are currently paying an 8.5% preferred dividend ($2.125 per year, paid in four quarterly installments) but in about 3.5 years (October 2027 to be precise), this gets converted to the three-month LIBOR spread plus a 624.1 base point increase. With a current 3-month SOFR rate (and assuming the company will use the SOFR as a replacement for the LIBOR) of about 5.28%, this would indicate a jump to just over 11.5%. The language in the prospectus and the annual report is pretty clear:

“If the calculation agent for the Series B Preferred Units determines that three-month LIBOR has been discontinued, it will determine whether to use a substitute or successor base rate that it has determined is most comparable to three-month LIBOR as the base distribution rate described in the immediately preceding sentence.”

As the LIBOR is an unsecured rate and the SOFR is a secured funding rate, there is a 26 basis point markup. This means that at the current three-month SOFR of 5.28%, the total preferred dividend yield will increase to 5.28% + 0.26% + 6.24% = 11.78% of the $25 principal value which results in a preferred dividend of $2.945 per preferred share.

As the Series B preferred shares are currently trading at $25.10 as well, I think the small premium versus the Series A is warranted. The current yield on the Series B preferred shares is just under 8.5% but the bigger prize would be in seeing the Series B not being called in 2027. As long as the three-month SOFR exceeds 3.00%, the preferred shares will reset to 9.5% on the principal value.

Investment thesis

I own both series of the preferred shares and I have no intention to sell my position. Given the strong financial performance and the robust balance sheet, I would still be interested in adding to my position, preferably below par. The Series A preferred shares can be called at any given time while the company can only call the Series B preferred shares from October 2027 on. And if the three-month SOFR remains at the current rates, I believe the likelihood of those shares being called is pretty high.