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, 2018
Date of Report: November 15, 2018
Business Overview: Teekay Tankers operates a fleet of double-hull tankers (Suezmax, Aframax, LR2) and a VLCC joint venture, employing vessels through fixed-rate time charters and spot market trading. The company also operates a ship-to-ship transfer business.
Key Financial Metrics
| Metric (in thousands USD) | Q3 2018 | Q2 2018 | Q3 2017 |
|---|---|---|---|
| Total Revenues | $175,915 | $171,659 | $91,238 |
| Loss from Operations (GAAP) | $(2,166) | $(13,415) | $(13,734) |
| Net Loss (GAAP) | $(17,484) | $(27,413) | $(22,380) |
| Loss Per Share (GAAP) | $(0.07) | $(0.10) | $(0.12) |
| Adjusted Net Loss (Non-GAAP) | $(18,001) | $(28,743) | $(13,966) |
| Cash Flow from Vessel Operations (Non-GAAP) | $27,750 | $16,554 | $20,551 |
| Free Cash Flow (Non-GAAP) | $12,558 | $1,980 | $11,947 |
Liquidity and Debt:
- Total liquidity as of September 30, 2018: $89.2 million ($54.4 million cash/cash equivalents + $34.8 million undrawn credit facilities).
- Long-term debt: $703.2 million.
- Current portion of long-term debt: $103.8 million.
Material Changes vs. Prior Periods
Year-Over-Year (Q3 2018 vs. Q3 2017):
- Revenues: Increased significantly from $91.2 million to $175.9 million, driven by the adoption of new revenue accounting standards (ASU 2014-09) which grossed up voyage charter revenues and expenses, and higher average spot rates.
- Net Loss: GAAP net loss narrowed to $17.5 million from $22.4 million. The prior year included a $7.9 million loss on vessel sales.
- Operational Impact: Results were negatively affected by the expiry of time-charter contracts (vessels moved to lower spot rates) and costs from sale-leaseback transactions, partially offset by higher spot rates.
Quarter-Over-Quarter (Q3 2018 vs. Q2 2018):
- Net Loss: Improved significantly from $27.4 million to $17.5 million, primarily due to higher average spot tanker rates in Q3.
- Cash Flow: Cash flow from vessel operations increased from $16.6 million to $27.8 million.
Guidance, Outlook, and Management Commentary
Market Outlook:
- Rate Strength: Crude spot rates strengthened counter-seasonally in Q3 and continued to rise in Q4 2018. Q3 rates were the highest since 2014 compared to Q2.
- Supply/Demand: Low fleet growth (0.6% net growth YTD 2018) due to high scrapping and limited newbuilds supports rates. Global oil demand remains firm despite modest economic slowdown forecasts.
- Geopolitics: New U.S. sanctions on Iranian oil (Nov 5, 2018) are expected to be offset by OPEC spare capacity and waivers granted to eight countries. Lower oil prices (below $70/bbl) reduce bunker costs but may cause rate volatility if OPEC revisits production levels.
- Regulatory: IMO 2020 sulphur regulations are expected to boost tanker demand via increased refinery throughput and new trade routes.
Recent Developments:
- Financing: Completed three financings totaling ~$100 million in liquidity (two sale-leaseback transactions and a working capital loan). Approximately $40 million of this liquidity closed after September 30, 2018.
- Q4 Spot Rates (to-date): Suezmax ~$19,000/day; Aframax ~$19,900/day; LR2 ~$17,000/day.
Risks: Potential early termination of charters, inability to renew contracts, volatility in oil production/demand, and changes in global regulations.
Investor Verification Checklist
- Accounting Change Impact: Verify the effect of the January 1, 2018 adoption of ASU 2014-09, which increased reported revenues and voyage expenses by $73.6 million for Q3 2018, altering comparability with prior periods.
- Liquidity Post-Transaction: Confirm the total liquidity position including the ~$40 million in financing proceeds closed in November 2018, which are not reflected in the September 30 balance sheet.
- Non-GAAP Reconciliations: Review Appendices A, B, and C to understand the adjustments made to GAAP net loss to arrive at Adjusted Net Loss and Free Cash Flow, specifically regarding unrealized derivative gains/losses and equity-accounted investments.
- Charter Mix: Assess the exposure to spot market rates versus fixed time-charter contracts, noting the expiry of time-charters in Q3 that moved vessels to the spot market.
- Debt Maturity Profile: Evaluate the extension of the debt maturity profile resulting from the recent sale-leaseback transactions and new loans.