Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and nine months ended September 30, 2010
Business Overview: The Company owns and operates a fleet of oil tankers (Aframax and Suezmax classes). Its strategy involves capturing upside in the spot market while utilizing fixed-rate time charters to mitigate downside risk. As of November 1, 2010, the fleet consisted of eight Aframax and five Suezmax tankers. A significant portion of the fleet operates in pooling arrangements managed by Teekay Corporation subsidiaries.
Key Financial Metrics
| Metric (in thousands USD) | 3 Months Ended Sep 30, 2010 | 3 Months Ended Sep 30, 2009 | 9 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2009 |
|---|---|---|---|---|
| Total Revenues | 30,345 | 26,703 | 96,864 | 108,377 |
| Net Income (Loss) | (269) | (2,856) | 8,010 | 33,062 |
| Operating Cash Flow | N/A | N/A | 48,460 | 68,100 |
| Cash and Equivalents (Sep 30, 2010) | 11,244 | vs. 10,432 (Dec 31, 2009) | ||
| Total Debt (Long-term + Current) | 419,528 | vs. 480,731 (Dec 31, 2009) | ||
| EPS (Basic & Diluted) | (0.01) | (0.05) | 0.18 | 1.05 |
Liquidity: Total liquidity (cash + undrawn credit facilities) was $132.9 million as of September 30, 2010. The Company maintains a revolving credit facility with $121.7 million undrawn.
Material Changes vs. Prior Period
- Net Income: Net income for the nine months ended September 30, 2010, decreased by 75.8% to $8.0 million from $33.1 million in the prior year. The third quarter 2010 reported a net loss of $0.3 million compared to a loss of $2.9 million in the same period in 2009.
- Derivative Losses: A significant driver of the decline was a realized and unrealized loss on derivative instruments of $14.9 million for the nine months ended September 30, 2010, compared to a gain of $2.3 million in the prior year. This was due to changes in interest rates affecting the fair value of interest rate swaps.
- Revenue Composition: Total revenues decreased 10.6% for the nine-month period. This was partially offset by $2.4 million in new interest income from a $115 million term loan investment made in July 2010.
- Operating Expenses: General and administrative expenses decreased by 23.6% for the nine-month period, primarily due to lower allocated expenses from the "Dropdown Predecessor" (vessels acquired from Teekay Corporation).
- Vessel Sales: The Company sold two Aframax tankers (Falster Spirit and Sotra Spirit) in 2010, resulting in a net loss on sale of vessels of $1.9 million for the quarter and $1.9 million for the nine months.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that tanker rates declined in Q3 2010 due to increased fleet supply (newbuilding deliveries and return of vessels from floating storage) and seasonal demand reductions. Spot rates remained weak in October 2010.
- Dividends: The Company intends to distribute all "Cash Available for Distribution" quarterly. A dividend of $0.31 per share was declared for the quarter ended September 30, 2010, payable November 30, 2010.
- Capital Strategy: The Company relies on external financing (debt and equity) to fund acquisitions. In October 2010, it completed a follow-on offering raising approximately $104.4 million. It also entered a joint venture for a new VLCC construction with a $49 million commitment.
- Risks:
- Market Risk: Exposure to fluctuations in spot tanker rates, interest rates, and foreign currency exchange rates.
- Derivative Risk: Unrealized losses on interest rate swaps significantly impacted net income; these are not designated as cash flow hedges.
- Covenant Compliance: Debt facilities require minimum liquidity of $35.0 million and 5.0% of total debt. The Company was in compliance as of September 30, 2010.
Investor Verification Checklist
- Derivative Impact: Verify the magnitude of unrealized losses on interest rate swaps ($10.9 million for the nine months) and their effect on reported net income versus cash flow.
- Dropdown Accounting: Confirm understanding of the "Dropdown Predecessor" accounting treatment, where results of vessels acquired from Teekay Corporation are recast as if acquired earlier, affecting comparability.
- Liquidity Position: Assess the reliance on the revolving credit facility ($121.7 million undrawn) to meet liquidity covenants and fund operations given the volatility of spot market cash flows.
- Debt Structure: Review the maturity profile of the $419.5 million long-term debt and the impact of the semi-annual reduction in the revolving credit facility starting in late 2012.
- Subsequent Events: Note the October 2010 equity offering and November 2010 vessel acquisitions (Esther Spirit and Iskmati Spirit) which were not included in the September 30 financial statements.