Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2017
Business Overview: The Company owns and operates crude oil and product tankers, employing a chartering strategy that balances spot market opportunities with fixed-rate time charters. It also operates a ship-to-ship (STS) transfer segment providing lightering support services. As of March 31, 2017, the fleet consisted of 55 vessels (46 owned, 9 chartered-in).
Key Financial Metrics
| Metric (in thousands USD) | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Revenues | $125,096 | $164,950 |
| Income from Operations | $9,012 | $53,838 |
| Net Income | $2,828 | $38,980 |
| Diluted EPS | $0.02 | $0.25 |
| Operating Cash Flow | $28,783 | $56,220 |
| Cash and Cash Equivalents (End of Period) | $47,564 | $68,374 |
| Total Debt (Principal) | $853,180 | $941,661 |
| Total Liquidity (Cash + Undrawn Credit) | $86,300 | $102,400 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $39.9 million (24.2%) primarily due to lower average realized spot Time-Charter Equivalent (TCE) rates and a reduction in fleet size from vessel sales and redeliveries.
- Profitability Drop: Net income fell by $36.2 million (92.7%) driven by a $4.4 million loss on the sale of vessels (two Suezmax and one Aframax) and lower operating income.
- Derivative Performance: The Company recorded a net gain of $0.5 million on derivative instruments in Q1 2017, compared to a loss of $7.8 million in Q1 2016, largely due to favorable movements in interest rate swaps.
- Debt Reduction: Total principal debt decreased by approximately $88.5 million due to repayments and prepayments, partially funded by vessel sales and equity issuances.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Market Conditions: Management anticipates softer tanker rates in 2017 compared to 2016 due to high fleet growth (forecast at 4.3% for 2017) and OPEC supply cuts. However, increased ton-mile demand from Atlantic Basin to Asia trade is expected to provide support for mid-sized tankers.
- Liquidity Needs: The Company expects to require additional financing over the next 12 months to meet minimum liquidity covenants and refinance a loan facility maturing in Q1 2018. Management believes it has sufficient liquidity to continue as a going concern.
- Dividend Policy: Quarterly dividends are expected to range from 30% to 50% of adjusted net income, with a minimum of $0.03 per share. A dividend of $0.03 per share was declared for Q1 2017.
Significant Developments and Risks
- Merger with TIL: In May 2017, the Company entered into a merger agreement to acquire Tanker Investments Ltd. (TIL) in a share-for-share exchange, expected to close in Q3 2017.
- Acquisition of TTOL: In May 2017, the Company acquired the remaining 50% interest in Teekay Tanker Operations Ltd. (TTOL) for $27.1 million plus working capital.
- Legal Proceedings: The Company holds an English Court Order against STX Offshore & Shipbuilding Co., Ltd. for $32.4 million regarding repudiated shipbuilding contracts. Enforcement is currently stayed due to STX's bankruptcy protection.
- Market Risks: Significant exposure to spot tanker rate volatility, interest rate fluctuations, and foreign currency exchange rates.
Investor Verification Checklist
- Liquidity Covenants: Verify the Company's ability to refinance the loan facility maturing in Q1 2018 and maintain the required hull coverage ratios (currently 127% for the 2016 Debt Facility).
- Vessel Sales Impact: Confirm the final sale prices and timing for the remaining vessels held for sale, specifically the Aframax tanker Kyeema Spirit (sold in June 2017).
- Merger Completion: Monitor shareholder approvals and regulatory conditions required to close the merger with Tanker Investments Ltd. (TIL).
- STX Arbitration: Track the status of STX's bankruptcy proceedings and the potential for recovering the $32.4 million award.
- Spot Rate Exposure: Assess the impact of the Company's high exposure to the spot market (33 vessels) on future cash flows given the forecasted fleet growth and softer rates.