Teekay Shipping Ests Adjusted

We are maintaining our Hold recommendation on Teekay Corp. (TK - Analyst Report), but reducing our target price to $37. TK reported second quarter EPS of $1.05 before nonrecurring items, below consensus of $1.20 and our estimate of $1.10, largely reflecting higher-than-expected minority interest expense.

Despite this, we are raising our diluted EPS estimates to $3.75 from $3 for 2008 and to $4 from $3.15 for 2009, due to higher revenue growth from current strengthening in spot tanker freight rates reflecting increasing tanker demand, limited tanker fleet supply and higher volumes of crude imports into China.

Our estimates do not incorporate potential revisions related to changes in the accounting treatment for derivatives. TK announced that these changes will necessitate restatements of financial results back to 2003. We believe the dividend is safe.

Demand for oil tanker capacity has been rising due to continued global economic growth. According to the International Energy Agency, world oil demand in 2008 is expected to average 86.9 million barrels per day (b/d), an increase of 1%, or 900,000 b/d, above 2007. Demand growth is forecast to increase by 1.1% during both the third and fourth quarters of 2008 relative to the comparable 2007 periods.

Extraordinary growth in drybulk sector has led to a large drop in new tanker orders, as well as the conversion of an increasing number of tankers for conversion to drybulk ships, thereby dampening tanker supply growth.

As a result, spot freight rates have generally been fairly strong. This provides significant operating leverage to the spot market and offers the company opportunities to pursue the best risk-adjusted returns in either the spot or fixed-rate markets. Teekay has also significantly improved its financial metrics using its strong cash flow over the last few years to enhance shareholder value.

Read the full analyst report on TK