Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Period: Three months ended March 31, 2019
Business Overview: The Company owns and operates crude oil and product tankers (Suezmax, Aframax, LR2) and provides ship-to-ship (STS) transfer services. As of March 31, 2019, the fleet consisted of 68 vessels, including 60 owned/leased and 8 chartered-in. The Company utilizes a chartering strategy balancing spot market exposure with fixed-rate time charters.
Key Financial Metrics
| Metric (in thousands USD) | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Revenues | $232,501 | $168,465 |
| Net Income (Loss) | $12,447 | $(19,153) |
| Income from Operations | $32,097 | $(8,421) |
| Operating Cash Flow | $46,221 | $(4,826) |
| Cash and Cash Equivalents | $75,045 | $47,962 |
| Total Debt (Long-term + Current) | $691,312 | $735,406 |
| Finance Lease Obligations | $369,753 | $375,289 |
| Basic EPS | $0.05 | $(0.07) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 38% to $232.5 million, driven by a 59% increase in net revenues for the conventional tanker segment. This was primarily due to higher average realized spot Time-Charter Equivalent (TCE) rates across Suezmax, Aframax, and LR2 vessels.
- Profitability Turnaround: The Company reported a net income of $12.4 million compared to a net loss of $19.2 million in Q1 2018. Operating income improved by $40.5 million, turning from a loss to a profit.
- Cost Increases: Voyage expenses rose 22% to $97.3 million, and time-charter hire expenses increased 102% to $9.4 million due to the addition of chartered-in vessels. Interest expense increased 33% to $16.9 million, largely due to new sale-leaseback transactions completed in late 2018.
- Derivative Performance: The Company recorded a net loss of $0.8 million on derivative instruments (interest rate swaps and FFAs), compared to a gain of $3.0 million in the prior year, reflecting changes in benchmark interest rates.
Outlook, Risks, and Management Commentary
- Market Outlook: Management anticipates near-term headwinds in Q2 2019 due to high fleet growth and refinery maintenance. However, they expect a market recovery in the second half of 2019 driven by increased global oil demand, refinery runs preparing for IMO 2020 regulations, and reduced fleet growth as the orderbook rolls off.
- Liquidity: Total consolidated liquidity (cash + undrawn credit facilities) was $116.2 million as of March 31, 2019. Management believes this, combined with operating cash flows, is sufficient to meet needs for the next 12 months.
- Subsequent Events: In May 2019, the Company completed a $63.7 million sale-leaseback transaction for two Suezmax tankers, increasing liquidity by approximately $25.0 million. The Working Capital Loan limit was also increased to $55.0 million.
- Risks: Key risks include volatility in spot tanker rates, changes in vessel values affecting debt covenants (hull coverage ratios), and the impact of geopolitical events (Iran, Venezuela, Libya) on oil supply and demand.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with hull coverage ratios (currently 157% for the 2016 Debt Facility and 210% for the 2017 Revolver) and minimum liquidity requirements.
- Spot Rate Volatility: Monitor Q2 2019 spot TCE rates to assess if the anticipated market recovery materializes as forecasted by management.
- Chartered-in Fleet: Review the performance and cost structure of the newly added chartered-in vessels (Aframax and LR2) which significantly increased time-charter hire expenses.
- Derivative Exposure: Assess the impact of interest rate fluctuations on the $281 million notional amount of interest rate swaps.
- Going Concern: Confirm Teekay Corporation's ability to meet covenants on the $161.1 million of term loans guaranteed by the parent company.