Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarterly period ended June 30, 2013 (Unaudited)
Business Overview: The Company owns and operates crude oil and product tankers. As of August 1, 2013, the fleet consisted of 28 owned vessels, 1 chartered-in vessel, and 4 newbuilding orders. The Company employs a chartering strategy utilizing fixed-rate time charters to reduce downside risk while capturing upside opportunities in the spot market.
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended June 30, 2013 |
Six Months Ended June 30, 2013 |
|---|---|---|
| Total Revenues | $43,492 | $88,445 |
| Net Loss | $(5,724) | $(7,677) |
| Net Loss Attributable to Common Stockholders | $(5,724) | $(7,677) |
| Basic EPS | $(0.07) | $(0.09) |
| Operating Cash Flow | N/A | $17,958 |
| Cash and Cash Equivalents (End of Period) | $37,708 | $37,708 |
| Total Debt (Long-term + Current) | $730,214 | $730,214 |
| Total Liquidity (Cash + Undrawn Credit) | $255.5 million | $255.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased to $43.5 million for the three months ended June 30, 2013, from $51.0 million in the same period in 2012. Net revenues (non-GAAP) dropped to $41.0 million from $50.9 million, primarily due to lower Time-Charter Equivalent (TCE) rates for Suezmax and Aframax tankers and the redelivery of MR tankers from time-charter contracts.
- Net Loss Widening: The Company reported a net loss of $5.7 million for the quarter, compared to a net loss of $4.3 million in the prior year quarter. For the six-month period, the loss widened to $7.7 million from $4.0 million.
- Loss Provision: A significant non-cash charge of $4.5 million was recorded for a loss provision on an investment in term loans. This relates to two defaulted loans secured by VLCCs, one of which remains detained in Egypt.
- Derivative Gains: The Company recognized a net gain of $2.7 million on derivative instruments for the quarter, compared to a loss of $3.9 million in the prior year, driven by unrealized gains on interest rate swaps due to rising forward interest rates.
- Interest Expense Reduction: Interest expense decreased significantly to $2.6 million for the quarter from $6.7 million in the prior year, largely due to the removal of interest expense allocations related to the "Dropdown Predecessor" in the comparative 2012 period.
Outlook, Risks, and Management Commentary
- Market Conditions: Crude tanker spot rates declined slightly in Q2 2013. The Suezmax sector faced pressure from increased U.S. domestic production and weak VLCC markets. The Aframax sector was impacted by reduced Russian exports and North Sea maintenance. LR2 product tanker rates faced downward pressure as vessels switched from crude to refined product cargoes.
- Dividend Policy: Commencing in Q1 2013, the Company adopted a fixed quarterly dividend of $0.03 per share, replacing the previous full payout policy.
- Newbuilding Orders: In April 2013, the Company ordered four LR2 product tankers from STX Offshore & Shipbuilding Co., Ltd. However, STX commenced a voluntary financial restructuring in May 2013, suspending refund guarantee applications. The Company has not made installment payments and retains the right to cancel orders until guarantees are received.
- VLCC Loan Default Risk: The Company took over management of two VLCCs securing defaulted term loans. One vessel is trading; the other is detained in Egypt. There is a risk that the value of the vessels or future operating cash flows may be insufficient to recover the full loan principal and accrued interest.
- Liquidity: Total liquidity stands at $255.5 million. Management believes this is sufficient to meet short-term needs for at least 12 months. The Company remains in compliance with all debt covenants.
Investor Verification Checklist
- VLCC Recovery: Verify the status of the detained VLCC in Egypt and the estimated timeline for release and return to service.
- STX Newbuildings: Monitor the resolution of STX's financial restructuring and the issuance of refund guarantees required to proceed with the four LR2 vessel orders.
- Term Loan Provision: Assess the adequacy of the $4.5 million loss provision and the potential for further write-downs if vessel values decline or operating costs rise.
- Debt Covenants: Confirm continued compliance with hull coverage ratios and liquidity covenants, particularly given the volatility in vessel values and spot rates.
- Dividend Sustainability: Evaluate the ability to maintain the fixed $0.03 quarterly dividend given the current net loss and reliance on spot market volatility for cash flow.