Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2019
Business Overview: The Company owns and operates crude oil and product tankers (Suezmax, Aframax, LR2) and provides ship-to-ship (STS) transfer services. As of June 30, 2019, the fleet consisted of 68 vessels, including 60 owned/leased and 8 chartered-in. The Company utilizes a chartering strategy balancing spot market exposure with fixed-rate time charters.
Key Financial Metrics
| Metric (in thousands USD) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Revenues | 434,778 | 340,124 |
| Income (Loss) from Operations | 37,148 | (21,836) |
| Net Loss | (1,860) | (46,566) |
| Operating Cash Flow | 64,366 | 10,470 |
| Cash and Cash Equivalents (End of Period) | 35,429 | 48,457 |
| Total Debt (Long-term + Current) | 593,226 | 735,406 |
| Obligations Related to Finance Leases | 426,936 | 375,289 |
| Working Capital | (41,023) Deficiency | 27,830 Surplus |
Note: Working capital deficiency in 2019 is attributed to the adoption of ASU 2016-02 (Leases) recognizing operating lease liabilities and changes in RSA structure.
Material Changes vs. Prior Period
- Operational Turnaround: The Company reported an operating income of $37.1 million for the six months ended June 30, 2019, a significant improvement from an operating loss of $21.8 million in the same period in 2018. This was driven by higher average realized spot Time-Charter Equivalent (TCE) rates across Suezmax, Aframax, and LR2 segments.
- Revenue Growth: Total revenues increased by 27.9% year-over-year, primarily due to higher spot rates and improved net results from Full Service Lightering (FSL) and STS transfer businesses.
- Net Loss Reduction: Net loss narrowed significantly to $1.9 million from $46.6 million, aided by reduced freight tax expenses and lower restructuring charges (none in 2019 vs. $0.98 million in 2018).
- Debt Reduction: Total long-term debt decreased by approximately $142 million due to prepayments funded by sale-leaseback transactions and cash flows.
- Derivative Losses: The Company incurred a net loss of $2.6 million on derivative instruments (interest rate swaps and FFAs) in the first half of 2019, compared to a gain of $4.1 million in the prior year period.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates a market recovery in the latter part of 2019 and into 2020. Fundamentals supporting this include expected increases in global refinery throughput ahead of IMO 2020 regulations, increased U.S. crude oil exports, and a low tanker orderbook resulting in reduced fleet growth.
- Liquidity: Total consolidated liquidity (cash + undrawn credit facilities) was $119.5 million as of June 30, 2019. Management believes this, combined with operating cash flows, is sufficient to meet liquidity needs for at least the next 12 months.
- Recent Transactions: In May 2019, the Company completed a $63.7 million sale-leaseback transaction for two Suezmax tankers. Proceeds were used to prepay revolving credit facilities.
- Risks and Contingencies:
- EU Blacklist: The Republic of the Marshall Islands (where the Company is incorporated) is on the EU "blacklist" for tax transparency. This could lead to increased monitoring, withholding taxes, or restrictions on EU funds, though removal is expected later in 2019.
- Covenants: The Company is subject to financial covenants regarding hull coverage ratios and minimum liquidity. As of June 30, 2019, the Company was in compliance with all covenants.
- Market Volatility: Results are highly sensitive to spot tanker rates, which are cyclical and subject to seasonal variations and geopolitical factors.
Investor Verification Checklist
- Covenant Compliance: Verify continued compliance with hull coverage ratios (currently 164% for the 2016 Debt Facility and 511% for the 2017 Revolver) and minimum liquidity requirements ($35 million + 5% of debt).
- EU Regulatory Status: Monitor the status of the Republic of the Marshall Islands on the EU blacklist and any resulting legislative impacts on operations.
- Spot Rate Sensitivity: Assess the impact of potential declines in spot TCE rates on operating cash flow, given the high exposure of the fleet to the spot market (52 vessels in RSAs).
- Debt Maturity Profile: Review the significant debt maturities in 2021 ($414.1 million in scheduled principal repayments) and the Company's refinancing strategy.
- Working Capital Position: Understand the drivers of the current working capital deficiency and the reliance on operating cash flow to address it.