Business Context and Reporting Period
Teekay Tankers Ltd. filed an annual Form 20-F for the fiscal year ended December 31, 2015, prepared under U.S. GAAP. The company owns and operates crude-oil and product tankers and provides ship-to-ship transfer, lightering, terminal-management and consultancy services. The filing presents full-year results; it does not provide a separate Q4 2015 income statement in the supplied text.
At year-end, the fleet comprised 45 owned conventional tankers, 13 chartered-in vessels, a 50%-owned VLCC and six ship-to-ship support vessels. Approximately 84.0% of 2015 net revenues came from spot-market operations, compared with 61.4% in 2014.
Key Financial Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $514.2 million | $250.0 million |
| Net revenue | $494.4 million | $238.8 million |
| Income from operations | $187.2 million | $62.1 million |
| Net income | $179.6 million | $60.5 million |
| Diluted EPS | $1.35 | $0.66 |
| EBITDA | $270.7 million | $122.7 million |
| Adjusted EBITDA | $279.1 million | $113.8 million |
| Operating cash flow | $166.8 million | $20.9 million |
| Cash and cash equivalents | $96.4 million | $162.8 million |
| Total debt | $1,164.6 million | $708.6 million |
| Total liquidity, including undrawn facilities | $111.0 million | $289.0 million |
| Total equity | $877.5 million | $478.3 million |
Income from operations represented approximately 36.4% of revenue, while net income represented approximately 34.9% of revenue. Adjusted EBITDA was approximately 56.5% of net revenue. These calculated margins are not company-defined GAAP measures.
Average tanker time-charter equivalent rates increased to $29,420 per revenue day from $20,200 in 2014. The company incurred $39.6 million of dry-docking expenditures and had 510 dry-docking off-hire days, compared with $17.1 million and 292 days, respectively, in 2014.
Material Changes Versus the Prior Comparable Period
- Revenue more than doubled, primarily because of fleet expansion, stronger tanker rates and five months of ship-to-ship transfer operations.
- Net revenue increased by $255.6 million, reflecting the acquisition of 12 Suezmax tankers, four LR2 tankers, one Aframax tanker, two common-control tankers, additional chartered-in vessels and higher realized spot rates.
- Operating income increased by $125.1 million and net income increased by $119.1 million.
- Operating cash flow rose by $145.8 million, but investing cash flow was negative $882.0 million because of vessel and business acquisitions.
- Vessel operating expenses increased to $137.2 million from $98.4 million, time-charter hire expense increased to $74.9 million from $22.2 million, and depreciation and amortization increased to $73.8 million from $53.3 million.
- The company acquired 12 modern Suezmax tankers from Principal Maritime for $661.3 million, including $612.0 million in cash and approximately 7.2 million Class A shares.
- In July 2015, the company acquired the ship-to-ship transfer business for approximately $47.3 million. The business contributed $33.1 million of 2015 revenue and $0.3 million of net income, including only five months of operations.
- The company issued substantial equity to fund acquisitions. Year-end shares outstanding were 132.8 million Class A shares and 23.2 million Class B shares, versus 95.3 million and 16.7 million, respectively, at year-end 2014.
- The company sold one MR tanker for $11.2 million and recognized a gain of $0.8 million, compared with a $10.0 million gain from the sale of two VLCC subsidiaries in 2014.
Liquidity, Debt and Capital Resources
Year-end total debt was $1.165 billion, including $174.0 million classified as current. Only $14.6 million was undrawn under revolving credit facilities, compared with $126.2 million at year-end 2014. The company reported compliance with all debt covenants at December 31, 2015.
Contractual obligations totaled approximately $1.258 billion, including $655.7 million of scheduled debt repayments, $510.6 million of debt maturities and $91.5 million of charter-in obligations. Expected interest payments were excluded from these principal amounts.
In January 2016, the company entered into a new $894.4 million term-loan and revolving-credit facility maturing in January 2021. Approximately $845.8 million was used to refinance two bridge facilities and the main corporate revolving facility.
Guidance, Outlook, Commentary and Unusual Items
- Management did not provide formal earnings or rate guidance in the supplied filing. It expected several favorable 2015 tanker-market fundamentals to persist in 2016, including high oil production, continued oil-demand growth, relatively modest mid-size tanker fleet growth and additional Iranian exports.
- Management forecast 2016 global oil-demand growth of approximately 1.2 million barrels per day, versus 1.6 million barrels per day in 2015, and anticipated Suezmax and Aframax fleet growth of approximately 4.6% and 4.0%, respectively.
- Beginning with the first-quarter 2016 dividend, the company adopted a policy targeting 30% to 50% of quarterly adjusted net income, subject to board discretion, with a minimum quarterly dividend of $0.03 per share. A $0.12-per-share fourth-quarter 2015 dividend was declared in December 2015; management expected to return to the normal quarterly dividend schedule in Q1 2016.
- The company recognized a $4.8 million benefit from amortization of unfavorable acquired time-charter contracts and a $4.8 million restructuring charge. The filing also includes $14.4 million of equity income from investments, compared with $5.2 million in 2014.
- The company obtained an English Court Order requiring STX Offshore & Shipbuilding to pay $32.4 million relating to four cancelled newbuilding contracts. No receivable was recorded because collection remained uncertain. A separate trial concerning option agreements was scheduled to begin April 11, 2016.
- Thirty-four conventional tankers had estimated market values below carrying values at January 1, 2016, although no impairment was recorded for 2015 because estimated undiscounted cash flows exceeded carrying values.
- Key risks include spot-rate and vessel-value cyclicality, high leverage, refinancing and covenant risk, charter expirations, dry-docking and operating-cost inflation, regulatory and environmental costs, piracy and geopolitical disruption, counterparty exposure, related-party dependence and Teekay Corporation's controlling voting position.
- Teekay Corporation controlled approximately 53.6% of total voting power despite holding a 25.9% economic interest. Its Class B shares carry five votes per share, subject to the stated voting limitation.
Important Facts for Investors to Verify
- Verify the effect of the January 2016 debt refinancing on near-term maturities, interest expense, liquidity and covenant headroom.
- Assess the sustainability of 2015 spot tanker rates and the sensitivity of cash flow to lower TCE rates, especially given the 84.0% spot-market exposure.
- Review the maturity and renewal profile of fixed-rate charters: nine of 13 fixed-rate contracts were scheduled to expire in 2016.
- Evaluate the cash-return implications of the new dividend formula, debt service, dry-docking requirements and planned fleet expansion.
- Monitor the STX enforcement proceedings and the uncertain recoverability of the $32.4 million arbitration award.
- Review vessel market values, impairment sensitivity and loan-to-value covenants, particularly as tanker values and freight rates fluctuate.
- Consider dilution from 2015 equity issuances and the continuing Class A equity distribution program.
- Review related-party fees, pooling arrangements, management agreements and Teekay Corporation's control and conflicts-of-interest provisions.