Business Context and Reporting Period
Teekay Tankers Ltd. is a Marshall Islands company providing marine transportation for crude oil and refined petroleum products, primarily through Suezmax, Aframax and LR2 tankers. It also operated ship-to-ship transfer, U.S. Gulf lightering and LNG terminal management businesses during 2019. The filing is the annual report on Form 20-F for the fiscal year ended December 31, 2019, prepared under U.S. GAAP; it is not a standalone fourth-quarter filing.
At year-end, the company had 55 owned or leased tankers, six chartered-in tankers and a 50% interest in one VLCC. Approximately 86.8% of 2019 net revenues came from spot-market operations. Teekay Corporation held a 28.7% economic interest and 54.0% voting interest.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $943.9 million | $776.5 million | 22% |
| Net revenue | $541.6 million | $395.2 million | 37% |
| Income from operations | $123.9 million | $7.2 million | Material increase |
| Net income (loss) | $41.4 million | $(52.5) million | Returned to profitability |
| Basic and diluted EPS | $1.23 | $(1.57) | Improved |
| EBITDA | $250.0 million | $133.2 million | 88% |
| Adjusted EBITDA | $260.2 million | $129.6 million | 101% |
| Operating cash flow | $117.7 million | $(7.3) million | Improved by $124.9 million |
| Cash and cash equivalents | $88.8 million | $54.9 million | 62% |
| Total debt, including finance leases | $1.024 billion | $1.111 billion | 8% decrease |
| Total equity | $989.9 million | $946.9 million | 5% increase |
Calculated margins were approximately 13.1% for operating income, 4.4% for net income, and 26.5% for EBITDA as a percentage of revenue. Net revenue increased primarily because of higher spot tanker rates. The company reported $150.3 million of consolidated liquidity at December 31, 2019, consisting of cash, cash equivalents and undrawn credit facilities.
Capital expenditures included $11.6 million for vessels and equipment and $46.3 million for dry docking. Eighteen vessels were dry docked in 2019, generating 731 dry-dock-related off-hire days, compared with eight vessels and 295 days in 2018.
Material Changes Versus the Prior Comparable Period
- Net revenues increased 43% in the tanker segment to $495.0 million, while tanker income from vessel operations increased to $124.0 million from $8.5 million.
- Average tanker TCE increased to $23,055 per revenue day from $16,469, driven by stronger Suezmax, Aframax and LR2 spot rates, particularly in the fourth quarter.
- Revenue growth was partly offset by higher voyage expenses, higher time-charter hire expense of $43.2 million versus $19.5 million, more dry-docking activity and a $5.5 million loss and write-down on vessel sales.
- Interest expense increased to $65.4 million from $58.7 million, and income-tax expense increased to $20.1 million from $9.4 million.
- The ship-to-ship transfer segment remained approximately breakeven, reporting a $0.2 million operating loss compared with a $1.3 million loss in 2018. Segment revenue declined 3% to $46.6 million.
- No cash dividends were declared or paid in 2019. In November 2019, the company abandoned its formulaic dividend policy and shifted its focus to deleveraging, reducing capital costs and building net asset value.
- The company completed a $63.7 million sale-leaseback financing for two Suezmax tankers and increased its working-capital facility to $80.0 million, of which $50.0 million was drawn at year-end.
- A one-for-eight reverse stock split became effective in November 2019. Year-end shares outstanding were approximately 29.0 million Class A shares and 4.6 million Class B shares.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a conventional earnings or rate forecast. It expected relatively low tanker fleet growth, estimated at approximately 3% in 2020 and 1.5% in 2021, but described the outlook for oil demand and tanker demand as highly uncertain.
- COVID-19, declared a pandemic in March 2020, could reduce oil demand, charter rates, utilization, customer credit quality, vessel values and liquidity. The filing states that the financial impact could not reasonably be estimated at the filing date.
- In January 2020, the company entered a new $532.8 million five-year debt facility maturing in late 2024. Approximately $455 million was used to repay two revolving facilities and one term loan scheduled to mature between 2020 and 2022.
- The company agreed to sell its non-U.S. ship-to-ship support business and LNG terminal management business for $26 million, subject to working-capital adjustments, with closing expected in the second quarter of 2020.
- The company agreed to sell four Suezmax tankers for aggregate proceeds of approximately $79 million during the fourth quarter of 2019 and first quarter of 2020. Two vessels were classified as held for sale at year-end and were written down by $3.2 million.
- All five fixed-rate time charters outstanding at December 31, 2019 were scheduled to expire in 2020, increasing potential exposure to spot-market volatility.
- IMO 2020 sulfur limits became effective January 1, 2020. The company uses compliant low-sulfur fuel and had not installed scrubbers; it expected higher voyage expenses but anticipated recovering fuel-price increases through charter rates.
- Ballast-water treatment installations were expected to cost approximately $1.5 million to $2.0 million per vessel between 2020 and 2023.
- The company was in compliance with debt, finance-lease and loan-to-value covenants at December 31, 2019. However, vessel-value declines could require additional collateral, debt repayment or refinancing.
- The company estimated sufficient liquidity for at least one year after issuance of the financial statements, assuming no significant decline in spot tanker rates. This assessment depended partly on Teekay Corporation’s ability to comply with covenants supporting guaranteed loans.
- Vessel values for 35 tankers were below carrying value at January 1, 2020, although estimated undiscounted cash flows exceeded carrying values and no impairment was recorded in 2019.
- Unrecognized tax benefits increased to $49.6 million from $32.1 million, reflecting changes in positions taken in prior years and current-year positions.
Most Important Facts to Verify
- Verify the post-refinancing debt maturity schedule, interest costs, covenant headroom and the company’s ability to refinance or repay obligations in 2021 through 2024.
- Assess sensitivity of cash flow and vessel values to spot tanker rates, COVID-19-related oil-demand changes and potential inventory drawdowns after floating-storage activity subsides.
- Confirm the timing, proceeds and accounting treatment of the planned business sale and Suezmax vessel sales.
- Review the sustainability of liquidity without dividends and with substantial finance-lease obligations, including approximately $414.8 million of finance-lease liabilities at year-end.
- Evaluate the effect of 2020 dry dockings, ballast-water treatment spending and IMO 2020 fuel costs on utilization, margins and operating cash flow.
- Review related-party arrangements, management fees, Teekay Corporation’s control and guarantees, and the potential termination payment under the long-term Management Agreement.
- Reconcile reported revenue growth with the adoption of revenue-recognition guidance, which increased both voyage revenue and voyage expense for 2019 by $321.2 million.