Teekay Tankers Ltd. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 20-F rather than a standalone quarterly filing; it provides fourth-quarter market commentary but does not present a clearly separable Q4 income statement.
Business context
Teekay Tankers owns and operates crude-oil and product tankers and provides ship-to-ship transfer, lightering, LNG terminal management and related services. At December 31, 2018, the fleet comprised 60 conventional owned or leased vessels, three chartered-in vessels, one jointly owned VLCC and six ship-to-ship support vessels. The company was heavily exposed to spot markets: approximately 70.8% of 2018 net revenues came from spot-market operations, directly or through revenue-sharing arrangements.
Key financial metrics
| Metric | FY2018 | FY2017 | Change / comment |
|---|---|---|---|
| Revenue | $755.8 million | $431.2 million | Up 75%; significantly affected by revenue presentation under ASU 2014-09 |
| Net revenues | $395.2 million | $353.8 million | Up 12% |
| Income from operations | $7.2 million | $1.4 million | Improved, but operating margin remained approximately 1% |
| Net loss | $52.5 million | $58.0 million | Loss narrowed |
| Basic and diluted loss per share | $0.20 | $0.31 | Loss per share improved; share count increased materially after the TIL merger |
| EBITDA | $133.2 million | $78.2 million | Up 70% |
| Adjusted EBITDA | $129.6 million | $125.7 million | Up 3% |
| Operating cash flow | $(7.3) million | $80.5 million | Material deterioration |
| Cash and cash equivalents | $54.9 million | $71.4 million | Down $16.5 million |
| Total debt, including capital-lease obligations | $1.129 billion | $1.121 billion | Broadly stable; capital-lease obligations increased significantly |
| Total equity | $946.9 million | $1.007 billion | Down primarily because of the annual net loss and dividends |
Conventional tanker net revenues increased to $347.0 million from $303.4 million, supported by the full-year contribution from 18 vessels acquired in the Tanker Investments Ltd. merger and additional in-chartered Aframax vessels. Segment income from vessel operations increased to $8.5 million from $4.0 million. The ship-to-ship transfer segment remained loss-making, with a $1.3 million operating loss versus a $2.6 million loss in 2017.
Cash flow, liquidity and capital structure
- Operating cash flow was negative $7.3 million, reflecting weaker operating earnings, increased dry-docking expenditures and unfavorable working-capital movements, including higher pool receivables.
- Cash, cash equivalents and restricted cash totaled $60.5 million at year-end, including $5.6 million of restricted cash. Consolidated liquidity, including cash and undrawn credit facilities, was $66.7 million, down from $160.0 million in 2017.
- Long-term debt principal was $742.0 million, with $735.4 million reported after debt issuance costs. Capital-lease obligations totaled $375.3 million.
- Debt and lease commitments totaled approximately $1.180 billion, including $266.7 million of scheduled debt repayments, $475.3 million of debt maturities, $375.3 million of capital-lease repayments and $62.5 million of chartered-in vessel commitments.
- Only $11.8 million was undrawn under revolving credit facilities at year-end. A separate working-capital facility provided up to $40 million, with an option for an additional $15 million, but no amounts were drawn at December 31, 2018.
- The company reported compliance with its debt, lease and loan-to-value covenants at year-end. Management concluded that liquidity would be sufficient for at least one year, relying partly on an expected tanker-market recovery, refinancing and subsequent financing transactions.
Material changes versus the prior comparable period
- Reported revenue increased sharply because the company adopted ASU 2014-09. Revenue from RSA voyages previously presented as net pool revenue was reported gross as voyage charter revenue, increasing both voyage charter revenue and voyage expenses by $292.6 million in 2018. Comparisons of gross revenue with 2017 are therefore not directly comparable.
- Net revenues improved despite lower average TCE rates in several vessel classes, primarily because the TIL fleet contributed for a full year and fleet capacity increased.
- Interest expense rose to $58.7 million from $31.3 million because of debt assumed or refinanced in connection with the TIL merger, sale-leaseback financing and higher variable interest rates.
- Operating cash flow fell by $87.8 million, from positive $80.5 million to negative $7.3 million.
- The company completed two 2018 sale-leaseback transactions covering ten vessels, generating $241.3 million of financing proceeds. Proceeds were primarily used to refinance or prepay debt.
- Effective May 2018, the company eliminated its $0.03 minimum quarterly dividend to preserve liquidity. The revised policy targets 30% to 50% of quarterly adjusted net income, subject to board discretion and reserves.
- Beginning October 1, 2018, the company brought certain commercial and technical management activities in-house and transitioned RSA activities to a new wholly owned structure.
- Eight vessels underwent dry docking in 2018, compared with seven in 2017. Dry-docking expenditures increased to approximately $27.9 million from $16.2 million, and 17 owned or leased vessels were scheduled for dry docking in 2019.
Guidance, outlook, risks and unusual items
- Management stated that tanker spot rates improved significantly in Q4 2018, supported by winter seasonality, higher OPEC and non-OPEC production, record U.S. crude production and exports, and low 2018 fleet growth.
- Management expected OPEC supply cuts, seasonal refinery maintenance and higher fleet growth to pressure tanker demand in the first half of 2019, but anticipated stronger conditions in the second half of 2019 and in 2020 from oil-demand growth, new refining capacity, U.S. exports, lower future fleet growth and IMO 2020-related trade opportunities.
- The company had not installed scrubbers and intended to use low-sulfur fuel to comply with the IMO 2020 sulfur limit. Ballast-water treatment systems were expected to cost approximately $2 million to $3 million per vessel.
- In February 2019, the company signed a non-binding term sheet for a $63.7 million sale-leaseback involving two Suezmax tankers. If completed, management expected approximately $25 million of incremental liquidity after repaying vessel debt. Completion remained subject to conditions and definitive documentation.
- Vessel values were below carrying values for 43 vessels, with estimated market values of $979.4 million versus carrying values of $1.558 billion. No impairment was recorded because estimated undiscounted cash flows exceeded carrying values.
- Principal risks include volatile spot tanker rates, vessel-value declines, refinancing and covenant requirements, high leverage and capital-lease obligations, interest-rate exposure, dependence on Teekay Corporation, environmental and regulatory costs, IMO 2020 and ballast-water compliance, sanctions, geopolitical disruption, piracy, cyberattacks and potential pollution liabilities.
- The company had an $8.9 million-per-subsidiary award related to repudiated STX shipbuilding contracts, but recorded no value for the STX equity received or the cash award because collectability and value were uncertain.
- Teekay Corporation controlled the company through its Class B shares and held a majority of voting power, creating related-party, corporate-opportunity and management-dependence risks.
Most important facts for investors to verify
- Reconcile 2018 gross revenue and voyage expenses on an apples-to-apples basis because ASU 2014-09 materially changed RSA revenue presentation.
- Review 2019 and 2020 debt maturities, refinancing plans and the company’s reliance on sale-leasebacks and Teekay Corporation covenant compliance.
- Assess whether negative 2018 operating cash flow was temporary working-capital timing or evidence of insufficient cash generation at prevailing tanker rates.
- Monitor vessel market values, loan-to-value cushions and potential impairment risk, particularly for the 43 vessels whose market values were below carrying values.
- Verify the completion and net liquidity benefit of the proposed February 2019 Suezmax sale-leaseback.
- Evaluate the sustainability of dividends under the discretionary 30% to 50% adjusted-net-income policy, noting that the minimum quarterly dividend was eliminated.
- Track spot-market exposure, TCE rates, dry-docking requirements, IMO 2020 fuel costs and ballast-water compliance expenditures.
- Review related-party fees, Teekay’s control rights, management-agreement termination provisions and the company’s dependence on Teekay Corporation.