Business Context and Reporting Period
Company: Teekay Tankers Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: Teekay Tankers is a Marshall Islands corporation engaged in the international marine transportation of crude oil. As of December 31, 2010, the fleet consisted of 15 vessels (nine Aframax-class and six Suezmax-class tankers). The company employs a chartering strategy that utilizes fixed-rate time charters to reduce downside risk while participating in the spot market (via the Teekay Pool and Gemini Pool) to capture upside opportunities. Operations are managed by Teekay Tankers Management Services Ltd., a subsidiary of Teekay Corporation.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 Value | 2009 Value |
|---|---|---|
| Revenues | $139.5 million | $159.7 million |
| Net Revenues (Non-GAAP) | $136.9 million | $154.2 million |
| Net Income | $16.3 million | $42.1 million |
| Earnings Per Share (Basic & Diluted) | $0.37 | $1.28 |
| EBITDA (Non-GAAP) | $69.2 million | $99.3 million |
| Adjusted EBITDA (Non-GAAP) | $81.6 million | $94.9 million |
| Operating Cash Flow | $58.4 million | $91.8 million |
| Total Debt | $459.9 million | $574.2 million |
| Cash and Cash Equivalents | $12.5 million | $10.4 million |
| Total Liquidity (Cash + Undrawn Credit) | $186.7 million | $134.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 16.0% to $139.5 million, and Net Revenues decreased 11.2% to $136.9 million. This was primarily driven by lower Time-Charter Equivalent (TCE) rates in the spot market and the sale of two Aframax tankers (Falster Spirit and Sotra Spirit) during the year.
- Profitability Drop: Net income fell 61.2% to $16.3 million. This decline was exacerbated by a $10.5 million realized and unrealized loss on derivative instruments (interest rate swaps), compared to a $4.3 million gain in 2009.
- Debt Reduction: Total debt decreased by approximately $114 million to $459.9 million, aided by proceeds from follow-on equity offerings and the repayment of debt associated with the "Dropdown Predecessor" vessels acquired from Teekay Corporation.
- Fleet Expansion: Despite selling two vessels, the company acquired five vessels from Teekay Corporation in 2010 (two Aframax and three Suezmax), increasing fleet capacity. These acquisitions were accounted for as transfers between entities under common control.
- Investment Activity: The company invested $115.6 million in term loans collateralized by two VLCCs and made a $9.8 million advance to a joint venture for a new VLCC construction.
Guidance, Outlook, and Risks
- Market Outlook: Management noted that tanker freight rates remained weak in Q4 2010 and Q1 2011 due to an oversupply of vessels and the return of vessels previously used for floating storage. Rising bunker fuel prices were also cited as an adverse factor for spot earnings.
- Dividend Policy: The company pays a variable quarterly dividend equal to "Cash Available for Distribution" from the previous quarter. For 2010, cash dividends paid were $55.2 million ($1.28 per share), down from $50.4 million ($1.86 per share) in 2009.
- Key Risks:
- Spot Market Volatility: A significant portion of the fleet operates in the spot market, exposing earnings to cyclical fluctuations in charter rates.
- Related Party Dependence: The company relies heavily on Teekay Corporation for management services, vessel acquisitions, and pool management. Conflicts of interest exist regarding business opportunities.
- Debt Covenants: Financing agreements contain covenants that could restrict dividend payments if breached. The company was in compliance as of year-end.
- Regulatory & Environmental: Compliance with environmental regulations (e.g., ballast water treatment, low sulfur fuel) may increase operating costs and require capital expenditures.
Investor Verification Checklist
- Derivative Impact: Verify the sensitivity of net income to interest rate fluctuations, given the $10.5 million loss on derivatives in 2010.
- Dropdown Accounting: Review Note 1 to understand how the financial results of vessels acquired from Teekay Corporation (Dropdown Predecessor) are recast and included in historical periods.
- Dividend Sustainability: Assess the "Cash Available for Distribution" metric and the impact of upcoming drydocking schedules (three vessels drydocked in 2010) on future cash flows.
- Debt Maturity Profile: Examine the revolving credit facility terms, noting the semi-annual reduction in availability starting in late 2012 and the 2017 maturity date.
- Related Party Transactions: Scrutinize the management fees and pool management fees paid to Teekay subsidiaries, which totaled approximately $7.5 million in 2010.