Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2017
Business Overview: The Company owns and operates crude oil and product tankers and provides ship-to-ship (STS) transfer services. As of June 30, 2017, the fleet consisted of 49 vessels (44 owned, 5 chartered-in). The Company operates two reportable segments: Conventional Tankers and Ship-to-Ship Transfer.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Jun 30, 2017 |
3 Months Ended Jun 30, 2016 |
6 Months Ended Jun 30, 2017 |
6 Months Ended Jun 30, 2016 |
|---|---|---|---|---|
| Total Revenues | $108,789 | $146,146 | $239,274 | $317,795 |
| Income from Operations | $1,587 | $32,948 | $12,328 | $89,772 |
| Net (Loss) Income | $(37,477) | $23,599 | $(33,764) | $63,983 |
| Diluted EPS | $(0.22) | $0.14 | $(0.21) | $0.39 |
| Operating Cash Flow | N/A | N/A | $63,901 | $109,971 |
| Cash & Equivalents (End of Period) | $87,255 | $93,753 | $87,255 | $93,753 |
| Total Debt (Principal) | $828,856 | N/A | $828,856 | $941,661 |
| Undrawn Credit Facilities | $25.9 million | N/A | $25.9 million | $34.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25.6% for the quarter and 24.7% for the six-month period compared to the prior year. This was driven by lower average realized spot Time-Charter Equivalent (TCE) rates and a reduction in fleet size due to vessel sales.
- Net Loss: The Company reported a net loss of $37.5 million for the quarter and $33.8 million for the six months, a significant reversal from net income of $23.6 million and $64.0 million in the respective prior-year periods.
- Equity Investment Impairment: A major contributor to the loss was a $28.1 million write-down of the Company's equity investment in Tanker Investments Ltd. (TIL) to fair value, triggered by a pending merger agreement.
- Operating Expenses: Vessel operating expenses decreased slightly due to vessel sales, while time-charter hire expenses dropped significantly (55.1% for the quarter) due to the redelivery of in-chartered vessels.
- Debt Reduction: Total principal debt decreased by approximately $113 million year-over-year due to repayments and prepayments.
Guidance, Outlook, and Risks
- Market Outlook: Management expects weak tanker rates to persist through the third quarter of 2017, with a normal seasonal uptick expected in the fourth quarter. A recovery in freight rates is anticipated in the second half of 2018 due to slowing fleet growth and improved oil market fundamentals.
- Liquidity Needs: The Company expects to require additional financing over the next 12 months to meet minimum liquidity covenants and fund operations, citing lower expected spot rates and a loan facility maturing in Q1 2018.
- Strategic Transactions:
- TIL Merger: A share-for-share merger with TIL is expected to close in Q4 2017, potentially increasing liquidity by ~$90 million.
- TTOL Acquisition: Completed the acquisition of the remaining 50% interest in Teekay Tanker Operations Ltd. (TTOL) in May 2017.
- Sale-Leaseback: Completed a $153 million sale-leaseback of four Suezmax tankers in July 2017, expected to result in a ~$80 million accounting write-down in Q3 2017.
- Risks: Key risks include volatility in spot tanker rates, high fleet growth, OPEC production cuts affecting demand, and the ability to refinance debt obligations. The Company is currently in compliance with all debt covenants.
Investor Verification Checklist
- Equity Impairment: Verify the $28.1 million write-down on the TIL investment and the potential for additional gains/losses upon merger completion.
- Liquidity Strategy: Confirm the status of refinancing the Q1 2018 maturing loan facility and the execution of the TIL merger.
- Subsequent Write-downs: Monitor Q3 2017 results for the anticipated ~$80 million accounting write-down related to the July 2017 sale-leaseback transaction.
- Dividend Policy: Note the dividend policy is based on "adjusted net income" (non-GAAP); verify the sustainability of dividends given the reported GAAP net loss.
- Debt Covenants: Review the hull coverage ratios (currently 130% and 113%) and ensure they remain above required thresholds (125% and 105%) amidst potential vessel value declines.