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, 2011
Business Overview: The Company owns and operates a fleet of oil tankers, primarily Aframax and Suezmax vessels. As of November 1, 2011, the fleet consisted of nine owned Aframax tankers, six owned Suezmax tankers, two time-chartered-in Aframax vessels, and a 50% interest in a VLCC newbuilding. The Company utilizes a chartering strategy combining fixed-rate time charters to mitigate downside risk and spot market exposure to capture upside opportunities.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Sep 30, 2011 | 9 Months Ended Sep 30, 2011 |
|---|---|---|
| Total Revenues | $29,695 | $92,866 |
| Net (Loss) Income | $(17,133) | $(8,600) |
| Operating Cash Flow | N/A | $43,006 |
| Cash and Cash Equivalents | $14,104 | $14,104 |
| Total Debt (Long-term + Current) | $349,350 | $349,350 |
| Total Liquidity (Cash + Undrawn Credit) | $291,600 | $291,600 |
| Dividends Declared (Per Share) | $0.21 | $0.68 |
Note: Total liquidity includes $14.1 million in cash and $277.5 million in undrawn revolving credit facility.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 12% for the quarter and 15% for the nine-month period compared to 2010. This was driven by lower Time Charter Equivalent (TCE) rates in the spot market and lower rates on new/renewed time-charter contracts.
- Net Loss: The Company reported a net loss of $17.1 million for the quarter and $8.6 million for the nine months, a significant deterioration from a net loss of $0.7 million and net income of $8.5 million in the comparable 2010 periods.
- Goodwill Impairment: A non-cash goodwill impairment charge of $13.3 million was recognized in Q3 2011 related to the Suezmax reporting unit due to weak market conditions and oversupply. No such charge existed in 2010.
- Debt Reduction: Long-term debt decreased significantly from $454.0 million at year-end 2010 to $349.4 million at September 30, 2011, following a $103.0 million prepayment using proceeds from a February 2011 equity offering.
- Derivative Losses: Realized and unrealized losses on interest rate swaps totaled $6.7 million for the quarter and $10.6 million for the nine months, compared to $5.6 million and $14.9 million in 2010.
Guidance, Outlook, and Risks
Market Outlook: Management notes that crude tanker rates weakened significantly in Q3 2011 due to an oversupply of vessels relative to demand. Factors included the release of 60 million barrels of oil from government stockpiles by IEA members and reduced demand from Libyan export disruptions. While rates spiked briefly in October due to Turkish Straits delays, the market remains generally weak.
Operational Strategy: The Company continues to seek fixed-rate time charters to reduce downside risk. Two Aframax vessels were time-chartered in during Q3 2011. Several fixed-rate contracts are scheduled to expire in late 2011 and 2012, with management noting no assurance of re-chartering at current rates.
Risks and Contingencies:
- Market Risk: Exposure to fluctuations in spot tanker rates, interest rates, and foreign currency exchange rates.
- Liquidity: The Company maintains a minimum liquidity covenant of $35.0 million and 5.0% of total debt. As of September 30, 2011, the Company was in compliance.
- Derivatives: The Company uses interest rate swaps to manage floating-rate debt exposure. Unrealized losses on these instruments impact net income but do not affect cash flow until realized.
- Goodwill: The impairment charge reflects the current valuation of the Suezmax fleet in a depressed market environment.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the fair value calculation for the Suezmax reporting unit, specifically regarding future cash flow projections and discount rates.
- Charter Expirations: Review the specific terms and expiration dates of the three Aframax time-charter contracts expiring in late 2011 to assess re-chartering risk.
- Debt Covenants: Confirm ongoing compliance with the minimum liquidity and hull coverage ratio covenants under the Revolving Credit Facility and Term Loan.
- Derivative Exposure: Assess the impact of rising interest rates on the fair value of the Company's interest rate swap portfolio and potential future realized losses.
- VLCC Joint Venture: Monitor the progress of the VLCC newbuilding and the status of the $68 million loan commitment from the financial institution.