Teekay Tankers Ltd. — FY2016 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; the source text does not provide a clear Q4-only income statement or cash flow statement. Financial statements are prepared under U.S. GAAP and were audited by KPMG with unqualified opinions.
Business context
Teekay Tankers owns and operates crude oil and product tankers and provides ship-to-ship transfer, full-service lightering, LNG terminal management and consultancy services. At December 31, 2016, the fleet comprised 43 owned conventional tankers, seven chartered-in conventional vessels, one 50%-owned VLCC and seven ship-to-ship support vessels. Approximately 78.2% of 2016 net revenues came from spot-market operations, directly or through pooling arrangements.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $526.9 million | $514.2 million | +2.5% |
| Net revenue | $471.7 million | $494.4 million | -4.6% |
| Income from operations | $86.5 million | $187.2 million | -53.8% |
| Net income | $62.9 million | $179.6 million | -65.0% |
| Basic/diluted EPS | $0.40 / $0.40 | $1.36 / $1.35 | Lower |
| Adjusted EBITDA | $229.3 million | $279.1 million | -17.8% |
| Operating cash flow | $210.0 million | $166.8 million | +25.9% |
| Cash and equivalents | $68.1 million | $96.4 million | Lower |
| Total debt | $933.0 million | $1,164.6 million | Lower |
| Total equity | $920.6 million | $877.5 million | Higher |
Net revenue margin was approximately 89.5% of reported revenue, compared with approximately 96.2% in 2015. Net income margin was approximately 11.9%, compared with approximately 34.9% in 2015. These are calculated from reported figures and are not company-defined non-GAAP metrics.
- Conventional tanker net revenue declined to $430.5 million from $477.0 million, primarily because average spot rates decreased. Average TCE declined to $23,445 per revenue day from $29,875.
- Ship-to-ship transfer revenue increased to $41.1 million from $18.6 million, but the segment reported a $2.2 million operating loss compared with a $0.2 million loss in 2015.
- Vessel operating expenses increased 33.1% to $182.6 million, while depreciation and amortization increased 41.2% to $104.1 million, reflecting the expanded fleet and acquired customer-related intangibles.
- The company recorded a $20.6 million loss on vessel sales and write-downs, versus a $0.8 million gain in 2015.
- Capital expenditures were $9.2 million for vessels and equipment and $9.3 million for dry docking. Only two vessels dry docked in 2016, compared with 18 in 2015.
Liquidity, debt and cash flow
- Total liquidity, including cash and undrawn facilities, was $102.4 million at year-end, including $34.3 million of undrawn revolving credit capacity.
- Operating cash flow was $210.0 million. Financing activities used $275.1 million, principally because of debt repayments and prepayments and $46.8 million of cash dividends. Investing activities provided $36.8 million, mainly from vessel sales and returns of capital from equity-accounted investments.
- Debt principal totaled $941.7 million before $8.6 million of unamortized discounts and issuance costs. Scheduled principal repayments were $171.4 million in 2017, $175.6 million in 2018, $110.0 million in 2019, $110.0 million in 2020 and $374.7 million in 2021.
- The company refinanced debt in January 2016 with an $894.4 million facility maturing in January 2021. Management reported compliance with all debt covenants at December 31, 2016.
- Interest-rate swaps had aggregate notional amounts of $400.0 million and a weighted-average fixed rate of approximately 1.46%. The company reported a $1.0 million net loss on derivatives for 2016.
Material changes versus 2015
- Reported revenue increased modestly, but net revenue and profitability declined materially as tanker spot rates softened from 2015 highs.
- Fleet expansion from the 2015 acquisitions increased operating expenses, depreciation and financing needs, but also contributed additional revenue days and operating cash flow.
- The ship-to-ship business contributed a full year of operations in 2016 versus approximately five months in 2015; revenue more than doubled, but the segment remained loss-making.
- Debt declined by approximately $231.6 million following refinancing and repayments. Cash declined by approximately $28.3 million, partly because of debt repayments and dividends.
- The dividend policy changed from a fixed $0.03 quarterly dividend to a target range of 30% to 50% of quarterly adjusted net income, subject to board discretion, with a $0.03 per-share quarterly minimum. Dividends declared were $0.18 per share in 2016 versus $0.24 in 2015.
- The company sold two MR tankers and two lightering support vessels and agreed to sell two Suezmax tankers. The Suezmax sales closed in January and March 2017.
Guidance, outlook, risks and unusual items
Management expected 2017 to present headwinds for crude tanker spot rates because of approximately 4.5% total tanker-fleet growth, approximately 5% mid-sized fleet growth, OPEC production cuts and potentially higher oil prices. Management viewed the downturn as potentially short and shallow, with a more favorable 2018 outlook due to limited ordering, expected scrapping and an aging fleet.
- Management stated that 2017 spot rates were expected to be lower than 2016 and disclosed that additional financing would likely be required to meet minimum liquidity requirements over the following year, including refinancing a facility maturing in the first quarter of 2018. The company nevertheless concluded that sufficient liquidity was probable for at least one year.
- Vessel values were below carrying values for 41 vessels, with aggregate market values of approximately $958.4 million versus carrying values of approximately $1.5936 billion. No impairment was recorded because estimated undiscounted cash flows exceeded carrying values.
- The company faces substantial exposure to volatile spot tanker rates, vessel values, charter renewals, operating costs, interest rates, fuel and environmental regulation, including future ballast-water and sulfur-emission requirements.
- The company obtained a $32.4 million English court order against STX Offshore & Shipbuilding relating to four cancelled newbuilding contracts, but recorded no receivable because collection was uncertain. STX bankruptcy protection stayed enforcement actions.
- The company is controlled by Teekay Corporation through a dual-class share structure, related-party management agreements and pooling arrangements. Teekay also has substantial influence over business opportunities and corporate governance.
- The company believes it is not a passive foreign investment company and expects to qualify for the U.S. Section 883 exemption, but acknowledges legal and factual uncertainty regarding future tax treatment.
- Adoption of new revenue and lease accounting standards was expected to affect revenue timing and balance-sheet presentation beginning in 2018, although the filing does not provide a clear quantified impact.
Investor verification checklist
- Verify the company’s ability to refinance 2018 maturities and maintain minimum liquidity if spot rates decline further.
- Review debt maturity schedules, vessel-value covenants, collateral requirements and the $34.3 million of undrawn revolver capacity.
- Assess the sensitivity of cash flow and dividends to the 78.2% spot-market revenue exposure and the scheduled expiration of fixed-rate charters.
- Evaluate whether the ship-to-ship and lightering businesses can reach profitability and generate the stable cash flows management expects.
- Monitor vessel sales, additional impairments and the gap between market and carrying values.
- Track the STX arbitration award and any potential recovery, noting that no receivable was recorded.
- Review related-party fees, Teekay’s voting control, management termination provisions and potential conflicts of interest.
- Confirm the board’s future dividend decisions under the variable dividend policy rather than assuming the minimum dividend will continue.