TNK

Business Context and Reporting Period

Company: Teekay Tankers Ltd. (NYSE: TNK)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2019
Date of Report: November 13, 2019

Teekay Tankers operates a fleet of crude and product tankers, primarily trading in the spot market. The company reported Q3 2019 results characterized by a net loss, driven by seasonal rate declines and dry-docking costs, though spot rates surged significantly in late Q3 and Q4.

Key Financial Metrics

Note: Liquidity comprised $76.7 million in cash and cash equivalents and $18.4 million in undrawn credit facility capacity.

Material Changes vs. Prior Periods

• Q3 2019 vs. Q2 2019: GAAP and Adjusted net losses increased. This was primarily due to lower average spot tanker rates in Q3 compared to Q2, partially offset by lower operating expenses. Q3 included unrealized gains on derivatives, whereas Q2 included unrealized losses.
• Q3 2019 vs. Q3 2018: Net losses increased year-over-year. Drivers included more scheduled dry-dockings in Q3 2019 and the expiration of fixed-rate time charter contracts that previously commanded higher rates. These negative factors were partially offset by higher average spot tanker rates in Q3 2019 compared to the prior year.
• Balance Sheet: Total assets increased to $2.17 billion from $2.15 billion in Q2 2019, largely due to the consolidation of Revenue Sharing Arrangement (RSA) activities under a new subsidiary structure (TTCL), which increased working capital balances.

Guidance, Outlook, and Management Commentary

Market Outlook and Rates

Management reports a significant strengthening of the tanker market in late Q3 and Q4 2019. Spot rates for the Suezmax and Aframax fleets secured for Q4 to-date averaged $38,000 and $30,500 per day, respectively. This represents increases of 133% and 105% compared to Q3 2019 rates. The outlook remains positive for the winter months and 2020 due to strong supply/demand fundamentals, increased U.S. crude exports, and IMO 2020 regulations.

Strategic Shifts

• Dividend Policy: The company is transitioning away from its formulaic dividend policy (30-50% of adjusted net income). Capital will now be prioritized for balance sheet deleveraging, building net asset value, and reducing the cost of capital.
• Capital Allocation: While the company does not intend to acquire vessels immediately, it may opportunistically sell existing assets to accelerate deleveraging as asset values strengthen.
• Reverse Stock Split: A one-for-eight reverse stock split was approved to improve marketability, effective November 25, 2019.
• Debt Refinancing: A term sheet was signed for a new 5-year, $595 million revolving credit facility to refinance 36 vessels, extending maturities to late 2024. Completion is expected in December 2019.

Risks and Contingencies

Key risks include volatility in crude tanker rates, geopolitical instability (specifically in the Middle East), changes in global oil demand, and the timing of IMO 2020 compliance. The company notes that periods of rate volatility are expected, particularly during winter months.

Investor Verification Checklist

• Debt Refinancing Completion: Verify the closing of the $595 million revolving credit facility in December 2019 and the specific terms regarding interest rates and covenants.
• Q4 Rate Realization: Confirm the actual TCE (Time Charter Equivalent) rates realized in Q4 2019 against the reported "to-date" averages of $38,000 (Suezmax) and $30,500 (Aframax).
• Dividend Suspension: Confirm the formal cessation of the quarterly dividend and the specific timeline for future capital return strategies.
• IMO 2020 Compliance Costs: Monitor actual expenditures related to scrubber installations and fuel procurement for the January 1, 2020 deadline.
• Reverse Stock Split Impact: Observe the post-split trading volume and price stability of the Class A common shares (Symbol: TNK) following the November 25, 2019 effective date.