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, 2016
Date of Report: August 4, 2016
Business Overview: Teekay Tankers owns and operates a fleet of double-hull tankers, including Suezmax, Aframax, LR2, and MR product tankers, as well as a VLCC through a joint venture. The company employs vessels through a mix of fixed-rate time charters and spot market trading.
Key Financial Metrics
| Metric (in thousands USD) | Q2 2016 | Q1 2016 | Q2 2015 |
|---|---|---|---|
| Total Revenues | $139,621 | $164,950 | $111,283 |
| GAAP Net Income | $22,486 | $38,980 | $45,150 |
| GAAP EPS (Basic) | $0.14 | $0.25 | $0.38 |
| Adjusted Net Income (Non-GAAP) | $31,600 | $45,958 | $41,253 |
| Adjusted EPS (Non-GAAP) | $0.20 | $0.29 | $0.35 |
| Free Cash Flow (Non-GAAP) | $59,600 | $66,218 | $57,897 |
| Total Liquidity (as of June 30, 2016) | $93,000 | $103,900 | N/A |
| Net Debt to Book Capitalization | ~51% (Projected) | N/A | N/A |
Note: Liquidity comprised $58.0 million in cash and cash equivalents and $35.0 million in undrawn revolving credit facilities.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 15.4% quarter-over-quarter (Q1 2016 to Q2 2016) and increased 25.5% year-over-year (Q2 2015 to Q2 2016). The QoQ decline was driven by lower spot tanker rates.
- Profitability: GAAP net income dropped 42.3% QoQ and 50.2% YoY. Adjusted net income fell 31.2% QoQ and 23.4% YoY.
- Rate Performance: Spot TCE rates declined across all vessel classes compared to Q1 2016. For example, Spot Aframax TCE fell from $27,471/day in Q1 to $23,792/day in Q2. However, Spot Aframax rates remained at their second-highest Q2 level since 2008.
- One-Time Impacts: GAAP results were negatively impacted by a $6.4 million asset impairment charge related to the write-down of the Teesta Spirit MR tanker and increased unrealized losses on derivative instruments.
Guidance, Outlook, and Management Commentary
- Market Outlook: Management expects lower seasonal freight rates to persist through Q3 2016, with an anticipated uptick during winter months due to increased oil demand and weather delays. Potential upside exists from the return of Atlantic basin oil supply volumes.
- Fleet Strategy: Since May 2016, the company secured four term contracts, increasing fixed-rate charter coverage to approximately 30% for the 12 months ending June 30, 2017. This strategy aims to lock in cash flows and reduce the cash flow break-even level.
- Dividend: Declared a cash dividend of $0.06 per share for Q2 2016, representing 30% of adjusted net income.
- Deleveraging: The sale of the Teesta Spirit for $14 million, combined with Q2 cash flow, is expected to reduce net debt to book capitalization to 51%.
- Risks: Key risks include delays in the sale of the Teesta Spirit, changes in global oil production/demand, fluctuations in newbuilding orders, and regulatory changes.
Investor Verification Checklist
- Asset Sale Completion: Verify the closing of the Teesta Spirit sale (expected mid-August 2016) and the realization of the $14 million proceeds.
- Fixed-Rate Coverage: Confirm the commencement dates and terms of the four new term contracts secured since May 2016 to validate the 30% fixed-rate coverage claim.
- Derivative Exposure: Review the reconciliation of unrealized losses on derivative instruments ($2.6 million in Q2) to understand the impact on future earnings volatility.
- Liquidity Position: Monitor the utilization of the $35 million undrawn revolving credit facility and cash burn rates against the $58 million cash balance.
- Fleet Growth vs. Scrapping: Assess the impact of the projected 5.7% global fleet growth in 2016 on spot rates, balanced against the potential for increased scrapping of older vessels post-2017.