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, 2008
Operations: The Company owns and operates a fleet of oil tankers, employing a strategy that combines fixed-rate time charters to reduce downside risk with spot market voyage charters to capture upside opportunities. As of September 30, 2008, the fleet consisted of nine Aframax-class and two Suezmax-class tankers. The financial statements include the results of two Suezmax vessels acquired from Teekay Corporation in April 2008, retroactively adjusted to reflect operations under common control since August 1, 2007.
Key Financial Metrics
| Metric (in thousands USD) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenues | $41,543 | $111,317 | $114,356 |
| Net Income | $19,561 | $52,683 | $34,864 |
| Earnings Per Share (Basic & Diluted) | $0.78 | $2.06 | $2.42 |
| Net Operating Cash Flow | N/A | $49,074 | $47,936 |
| Total Debt (Long-term + Current) | $319,728 | $319,728 | $332,107 |
| Cash and Cash Equivalents | $16,873 | $16,873 | $34,839 |
| Total Liquidity (Cash + Undrawn Credit) | $72,600 | $72,600 | $149,800 |
Note: Debt figures represent total long-term debt plus current portion. Liquidity includes $55.7 million undrawn on the revolving credit facility.
Material Changes vs. Prior Period
- Revenue: Total revenues for the nine months ended September 30, 2008, decreased slightly by 2.7% compared to the prior year ($111.3M vs. $114.4M). However, Net Voyage Revenues (a non-GAAP measure) increased by 36.4% to $110.3 million, driven by higher Time Charter Equivalent (TCE) rates in the spot market and the inclusion of the two Suezmax vessels.
- Profitability: Net income increased 51.1% year-over-year for the nine-month period ($52.7M vs. $34.9M). Income from vessel operations rose 55.1% to $64.2 million.
- Expenses:
- Voyage Expenses: Decreased significantly by 97.0% ($1.0M vs. $33.5M) due to a shift in charter mix; more vessels were on time charters where the customer pays voyage expenses, compared to voyage charters where the Company pays.
- Vessel Operating Expenses: Increased 33.4% ($22.1M vs. $16.6M) due to the addition of two Suezmax vessels and rising crew wage levels.
- Interest Expense: Increased 81.4% ($11.9M vs. $6.5M) due to higher debt balances from the Suezmax acquisition and unrealized losses on interest rate swaps.
- Liquidity: Total liquidity decreased from $149.8 million at year-end 2007 to $72.6 million at September 30, 2008, primarily due to the drawdown of the revolving credit facility to fund the Suezmax acquisition and dividend payments.
Guidance, Outlook, and Risks
- Market Outlook: Management noted that spot tanker freight rates in Q3 2008 were the highest on record for a third quarter, driven by increased oil production from OPEC and rising import volumes. However, rates for very large crude carriers eased in Q4 2008 due to OPEC production cutbacks, while medium-sized tanker rates remained firm due to seasonal winter demand.
- Dividends: The Company intends to distribute all "Cash Available for Distribution" quarterly. A dividend of $1.07 per share was declared for Q3 2008 (paid Dec 2008), and $0.72 per share for Q4 2008 (to be paid March 2009).
- Capital Strategy: The Company has the right to purchase two additional Suezmax tankers from Teekay Corporation prior to July 2009. Future expansion may rely on external financing.
- Risks and Contingencies:
- Market Risk: Significant exposure to fluctuations in spot tanker rates, interest rates, and foreign currency exchange rates. The Company uses interest rate swaps to hedge floating-rate debt but does not currently hedge foreign currency or spot rates.
- Derivative Liability: The Company expects to record a material unrealized loss in Q4 2008 related to the fair value of its interest rate swap agreement due to credit market volatility.
- Asset Impairment: Management is assessing whether the sharp decline in economic conditions in Q4 2008 has caused any assets to be impaired, which could result in writedowns.
- Covenants: The Company must maintain liquidity of the greater of $35.0 million or 5.0% of total debt. Breach of covenants could restrict dividend payments.
Investor Verification Checklist
- Derivative Valuation: Verify the magnitude of the expected unrealized loss on the interest rate swap in Q4 2008 and its impact on net income.
- Asset Impairment: Monitor Q4 2008 filings for any asset writedowns resulting from the credit market disruptions and economic downturn.
- Liquidity Covenants: Confirm continued compliance with the liquidity covenant (greater of $35M or 5% of debt) given the reduced cash balance and undrawn credit facility.
- Dividend Sustainability: Assess the impact of potential Q4 2008 earnings volatility on the ability to maintain the declared dividend levels.
- Related Party Transactions: Review the extent of reliance on Teekay Corporation for management services, pool management, and potential future vessel acquisitions.