TNK

Business Context and Reporting Period

Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Earnings Release)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2010.
Date of Report: February 28, 2011.

Teekay Tankers operates a fleet of double-hull Aframax and Suezmax tankers, employing a mix of fixed-rate time-charter contracts and spot market trading. The company also holds a 50% joint venture interest in a VLCC newbuilding and has invested in two VLCC term loans.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Q4 net revenues decreased to $29.6 million from $33.2 million in Q3 2010, driven by lower average realized tanker rates for both time-charter and spot fleets. Full-year 2010 revenues were $136.9 million, down from $154.2 million in 2009.
• Profitability: Adjusted net income for Q4 2010 was $2.6 million, a decrease from $5.8 million in Q3 2010. Full-year adjusted net income fell to $22.4 million from $27.7 million in 2009, primarily due to weaker spot rates, partially offset by $5.3 million in income from VLCC loan investments and fleet expansion.
• GAAP Volatility: GAAP net income for Q4 2010 was $7.8 million, a significant improvement over the Q3 2010 net loss of $0.7 million. This swing was largely influenced by a $5.9 million unrealized gain on interest rate swaps in Q4, compared to a $4.2 million unrealized loss in Q3.
• Liquidity Expansion: Total liquidity increased from $186.7 million at year-end 2010 to approximately $295 million in late February 2011, following a public equity offering that generated net proceeds of $107.6 million.

Guidance, Outlook, and Management Commentary

• Market Outlook: Management anticipates continued weakness in spot tanker rates for 2011 due to fleet oversupply and the return of vessels from temporary floating storage. Rising bunker fuel prices are also noted as an adverse factor for spot earnings.
• Fleet Strategy: To mitigate spot market volatility, the company has tactically managed its fleet mix. Over 50% of vessel operating days for 2011 are covered under fixed-rate charters earning a weighted average of approximately $24,500 per day. Fixed-rate coverage is estimated at 62% for Q1 2011 and 57% for the full fiscal year.
• Dividend Policy: The company declared a Q4 dividend of $0.22 per share. For Q1 2011, the company provided a dividend estimate table ranging from $0.15 to $0.45 per share, dependent on spot rate assumptions for Suezmax and Aframax vessels.
• Recent Transactions:
  • Acquired one Suezmax and one Aframax tanker for $107.5 million in November 2010.
  • Commenced a 23-month extension on the Suezmax tanker Narmada Spirit in January 2011 with a fixed-rate floor of $21,500 per day.
• Risks: Key risks include changes in oil demand, vessel supply/demand imbalances, regulatory changes regarding single-hull tankers, interest rate fluctuations, and the ability to renew contracts or secure new acquisitions.

Investor Verification Checklist

• Dividend Sustainability: Verify the sensitivity of the Q1 2011 dividend to spot rate fluctuations using the provided estimate table.
• Fixed-Rate Coverage: Confirm the specific terms and expiration dates of the fixed-rate time-charter contracts covering 57-62% of the fleet.
• VLCC Loan Exposure: Assess the credit risk associated with the two VLCC term loans, which contributed $5.3 million to 2010 income.
• Debt Maturity Profile: Review the maturity schedule of the $452.2 million long-term debt to ensure alignment with liquidity projections.
• Non-GAAP Reconciliation: Review Appendix A to understand the magnitude of unrealized derivative gains/losses impacting GAAP vs. Adjusted Net Income.