Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and nine months ended September 30, 2016
Business Overview: The Company owns and operates crude oil and product tankers. As of September 30, 2016, the fleet consisted of 57 vessels, including 51 owned, 6 in-chartered, and 6 ship-to-ship (STS) support vessels. Operations are divided into two segments: Conventional Tankers and Ship-to-Ship Transfer.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Sep 30, 2016 | 9 Months Ended Sep 30, 2016 |
|---|---|---|
| Total Revenues | $104,621 | $409,192 |
| Net (Loss) Income | $(5,457) | $56,009 |
| Income from Operations | $(3,793) | $80,796 |
| Net Operating Cash Flow | N/A | $181,455 |
| Cash and Cash Equivalents (Sep 30, 2016) | $59,237 | $59,237 |
| Total Debt (Principal) | $976,155 | $976,155 |
| Undrawn Credit Facilities | $60,000 | $60,000 |
| Diluted EPS | $(0.03) | $0.36 |
Material Changes vs. Prior Period
- Revenue: Total revenues decreased 17% for the three months ended September 30, 2016 ($104.6M) compared to the same period in 2015 ($126.4M), primarily due to lower average realized rates in the spot market. For the nine months, revenues increased 18% ($409.2M vs. $345.2M), driven by fleet expansion (acquisition of 12 Suezmax tankers in late 2015) and the inclusion of the STS transfer business.
- Profitability: The Company reported a net loss of $5.5M for the quarter, a significant decline from the $41.0M net income in the prior year quarter. This was largely due to asset impairments of $7.8M related to the write-down of two MR tankers to their agreed sales prices. For the nine months, net income was $56.0M, down from $126.1M in the prior year.
- Expenses: Vessel operating expenses increased significantly year-over-year due to the larger fleet size. Depreciation and amortization rose to $25.9M (quarter) and $78.6M (nine months) compared to $17.9M and $48.3M in the prior year periods, respectively.
- Derivatives: The Company recognized a net gain of $3.6M on derivative instruments for the quarter, compared to a loss of $1.0M in the prior year, driven by unrealized gains on interest rate swaps and a new time-charter swap.
Guidance, Outlook, and Risks
- Market Outlook: Management expects the tanker market to improve over the winter months due to seasonality and recovering oil production in Nigeria and Libya. However, crude tanker rates fell to a three-year low in Q3 2016 due to production outages and fleet growth.
- Dividend Policy: The Company adopted a new dividend policy in Q1 2016, targeting quarterly dividends ranging from 30% to 50% of quarterly adjusted net income, with a minimum of $0.03 per share.
- Legal Proceedings: The Company obtained an English Court Order in February 2016 requiring STX Offshore & Shipbuilding Co., Ltd. to pay $32.4M in damages regarding repudiated shipbuilding contracts. However, STX has filed for bankruptcy protection, staying enforcement actions. No receivable has been recorded due to collection uncertainty.
- Debt Covenants: The Company is in compliance with all covenants. A key covenant requires maintaining a minimum hull coverage ratio of 125% for the new debt facility; the ratio was 140% as of September 30, 2016.
- Unusual Items: Asset impairments of $14.2M were recorded for the nine months ended September 30, 2016, related to the write-down of two MR tankers. A loss on the sale of one vessel was $0.1M.
Investor Verification Checklist
- Asset Impairments: Verify the valuation and sale status of the two MR tankers written down in Q3 2016 and the two Suezmax tankers agreed for sale in October 2016 (expected Q4 2016 write-down).
- STX Litigation: Monitor the status of the $32.4M judgment against STX and the impact of STX's bankruptcy protection on potential recovery.
- Debt Refinancing: Review the terms of the $894.4M long-term debt facility entered in January 2016 and the scheduled repayments, particularly the revolver maturing in 2021.
- Spot Market Exposure: Assess the impact of fluctuating spot rates on the 37 vessels operating in the spot market, which contributes to revenue volatility.
- Dividend Sustainability: Evaluate the "adjusted net income" metric used for dividend calculations against GAAP net income to understand the sustainability of the payout policy.