Business Context and Reporting Period
Company: Teekay Tankers Ltd. (NYSE: TNK)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2017
Date of Report: August 3, 2017
Teekay Tankers operates a fleet of conventional oil tankers, including Suezmax, Aframax, and LR2 product tankers, employed through fixed-rate time charters and spot market trading. The quarter was characterized by challenging market headwinds, including seasonal weakness, high fleet growth, and lower OPEC production, which suppressed spot rates.
Key Financial Metrics
| Metric (in thousands USD) | Q2 2017 | Q1 2017 | Q2 2016 |
|---|---|---|---|
| Total Revenues | $108,789 | $130,485 | $145,738 |
| Income from Vessel Operations | $1,587 | $10,741 | $32,948 |
| GAAP Net (Loss) Income | ($37,477) | $3,713 | $23,599 |
| GAAP EPS (Basic) | ($0.22) | $0.02 | $0.14 |
| Adjusted Net (Loss) Income (Non-GAAP) | ($7,068) | $7,028 | $31,600 |
| Adjusted EPS (Non-GAAP) | ($0.04) | $0.04 | $0.20 |
| Free Cash Flow (Non-GAAP) | $18,711 | $34,358 | $59,600 |
| Total Liquidity (as of June 30, 2017) | $113.2 million | $86.3 million | N/A |
Note: Liquidity comprises $87.3 million in cash and cash equivalents and $25.9 million in undrawn revolving credit facilities.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25% year-over-year (Q2 2016 to Q2 2017) and 17% sequentially (Q1 2017 to Q2 2017), driven by lower spot tanker rates and a reduced fleet size.
- Net Loss: The company reported a GAAP net loss of $37.5 million in Q2 2017, compared to a net income of $23.6 million in Q2 2016. This reversal was primarily due to:
- A non-cash impairment charge of $28.1 million on the investment in Tanker Investments Ltd. (TIL) related to the proposed merger.
- Lower unrealized gains on derivative instruments.
- Significant decline in Time Charter Equivalent (TCE) rates across Suezmax, Aframax, and LR2 segments.
- Dividend: Declared a cash dividend of $0.03 per share, representing the minimum quarterly dividend.
Guidance, Outlook, and Strategic Developments
Strategic Transactions
- TIL Merger: Agreed to acquire Tanker Investments Ltd. (TIL) in a share-for-share merger (3.30 TNK shares for 1 TIL share). The deal is expected to close in Q4 2017, adding 18 modern tankers, reducing average fleet age by one year, and improving liquidity and leverage.
- TTOL Acquisition: Completed acquisition of the remaining 50% interest in Teekay Tanker Operations Ltd. (TTOL) for $39.1 million, consolidating 100% of its results.
- Sale-Leaseback: Completed a $153 million sale-leaseback of four Suezmax tankers in July 2017, increasing liquidity by ~$30 million. This transaction is expected to trigger an accounting write-down of ~$20 million per vessel in Q3 2017.
- Vessel Sale: Sold the older Aframax tanker Kyeema Spirit for ~$7.5 million.
Market Outlook
- Short-Term: Management expects weak tanker rates to persist through the remainder of Q3 2017 due to seasonal weakness and high fleet growth, with a normal seasonal uptick expected in Q4.
- Long-Term: Anticipates a recovery in freight rates from the second half of 2018, driven by a significant slowdown in fleet growth and improved oil market fundamentals.
- Fleet Growth: Forecasts global tanker fleet growth of ~5.5% for 2017, with much lower growth expected in 2018 as the orderbook rolls off and scrapping increases.
Investor Verification Checklist
- Merger Approval: Verify the status of shareholder and regulatory approvals required to close the TIL merger in Q4 2017.
- Q3 Write-Down Impact: Confirm the timing and magnitude of the expected $80 million aggregate accounting write-down ($20M x 4 vessels) from the sale-leaseback transaction in Q3 2017.
- Liquidity Position: Monitor cash burn rates and the utilization of the $25.9 million undrawn credit facility given the Q2 net loss.
- Rate Recovery: Track spot rate trends for Suezmax and Aframax vessels to validate management's forecast of a Q4 seasonal uptick and 2018 recovery.
- Dividend Sustainability: Assess the ability to maintain the minimum dividend given the adjusted net loss and upcoming capital expenditures.