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, 2009
Business Overview: The Company owns and operates oil tankers (Aframax and Suezmax classes). Its strategy involves capturing upside in the spot market while using fixed-rate time charters to mitigate downside risk. As of November 1, 2009, the fleet consisted of nine Aframax and three Suezmax tankers. The financial statements include results for three Suezmax vessels acquired from Teekay Corporation (the "Dropdown Predecessor") accounted for as a common control transaction, recasting prior periods to include these assets.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Sep 30, 2009 | 3 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $21,899 | $47,284 | $87,352 | $126,120 |
| Net Voyage Revenues (Non-GAAP) | $20,611 | $46,596 | $84,970 | $124,615 |
| Net (Loss) Income | $(1,517) | $21,658 | $31,018 | $57,606 |
| Diluted EPS | $(0.05) | $0.78 | $1.05 | $2.06 |
| Operating Cash Flow (9 Months) | $55,246 (2009) vs $43,750 (2008) | |||
| Cash and Equivalents (Sep 30, 2009) | $13,396 | |||
| Total Liquidity (Sep 30, 2009) | $137.1 million (includes $123.7M undrawn credit) | |||
| Long-Term Debt (Sep 30, 2009) | $302.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 53.7% in Q3 2009 and 30.7% for the nine-month period compared to 2008. This was primarily driven by a significant drop in average Time Charter Equivalent (TCE) rates in the spot market due to reduced global oil demand and fleet growth.
- Net Loss in Q3: The Company reported a net loss of $1.5 million for Q3 2009, a reversal from the $21.7 million net income in Q3 2008. The nine-month net income declined 46.2% to $31.0 million.
- Interest Expense Reduction: Interest expense decreased significantly (69.2% in Q3, 53.9% for nine months) due to lower interest rates on outstanding loans and debt prepayments of $20.0 million during the nine months ended September 30, 2009.
- Derivative Impact: The Company recognized a realized and unrealized loss of $4.6 million on interest rate swaps in Q3 2009, compared to a loss of $2.1 million in Q3 2008. However, for the nine-month period, the swap resulted in a net gain of $2.3 million in 2009 versus a loss of $2.1 million in 2008.
- Capital Structure: In June 2009, the Company completed a follow-on public offering of 7.0 million Class A shares, raising gross proceeds of $68.6 million. Net proceeds were used to acquire the Suezmax tanker Ashkini Spirit for $57.0 million and to repay debt.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that spot tanker rates declined to multi-year lows in Q3 2009. However, the IMF upgraded its 2010 global GDP growth forecast to 3.1%, and the IEA projected a 1.6% increase in global oil demand for 2010. Increased scrapping of single-hull tankers ahead of the 2010 IMO phase-out may help dampen fleet growth.
- Dividend Policy: The Company intends to distribute all "Cash Available for Distribution" quarterly. A dividend of $0.40 per share was paid on August 31, 2009. Dividends are subject to reserves for drydocking and debt repayment.
- Liquidity: Total liquidity stood at $137.1 million as of September 30, 2009. The Company is in compliance with all debt covenants, including a minimum liquidity requirement of $35.0 million.
- Key Risks:
- Market Cyclicality: Revenue is highly sensitive to spot market rates, which are volatile and seasonal (typically weaker in Q3).
- PFIC Status: There is a risk that U.S. tax authorities could classify the Company as a Passive Foreign Investment Company (PFIC), which would have adverse tax consequences for U.S. holders. The Company currently maintains it is not a PFIC.
- Regulatory Changes: New EU regulations effective January 1, 2010, require vessels to burn low-sulphur fuel while berthed, potentially increasing operating costs and requiring capital expenditures for equipment modifications.
Investor Verification Checklist
- Accounting Recasting: Verify the impact of the "Dropdown Predecessor" accounting treatment, which recasts prior periods to include three Suezmax vessels acquired from Teekay Corporation as if they were owned since 2007.
- Derivative Valuation: Review the fair value of the interest rate swap (recorded as a liability of $17.3 million) and its impact on net income, given the volatility in credit markets.
- Debt Covenants: Confirm ongoing compliance with the revolving credit facility's liquidity covenant (minimum $35.0 million) and the term loan's hull coverage ratio (105%).
- PFIC Determination: Assess the Company's position regarding PFIC status in light of the Tidewater Inc. v. United States court decision and its potential impact on U.S. investor taxation.
- Charter Expirations: Monitor the expiration of fixed-rate time charters, with three contracts expiring in 2010, which could expose the Company to spot market volatility.