TNK

Business Context and Reporting Period

Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Earnings Release)
Reporting Period: Third Quarter ended September 30, 2011
Date of Report: November 10, 2011

Teekay Tankers operates a fleet of conventional oil tankers, primarily Aframax and Suezmax vessels, utilizing a mix of fixed-rate time-charter contracts and spot market trading. The company declared a quarterly cash dividend of $0.15 per share, down from $0.21 in the prior quarter, reflecting weaker spot market conditions.

Key Financial Metrics

Note: Adjusted Net Income excludes non-cash items such as goodwill impairment and unrealized losses on derivatives.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 12.6% year-over-year in Q3 2011 due to lower average realized tanker rates in both spot and fixed fleets.
• GAAP Loss Widening: The company reported a GAAP net loss of $17.1 million in Q3 2011 compared to a loss of $0.3 million in Q3 2010. This deterioration was driven by a $13.3 million non-cash goodwill impairment charge and $5.1 million in unrealized losses on interest rate swaps.
• Adjusted Income Drop: Adjusted net income fell 77.6% year-over-year to $1.3 million, primarily attributed to weaker spot market rates.
• Dividend Reduction: The declared dividend decreased to $0.15 per share from $0.21 in the previous quarter, aligning with the reduction in Cash Available for Distribution.

Guidance, Outlook, and Management Commentary

Management Commentary

CEO Bruce Chan highlighted that tactical fleet management has increased fixed-rate coverage to 63% for the remainder of 2011, insulating the company from spot market volatility. Two Aframax tankers were time-chartered out at rates significantly above current spot levels ($18,000 and $17,000 per day). Management emphasized a strong liquidity position of over $290 million with no near-term debt repayment obligations.

Market Outlook

Tanker rates weakened in Q3 2011 due to oversupply and reduced demand from IEA stockpile releases. While rates remained weak in early Q4, localized spikes occurred in the Mediterranean and Black Sea due to Turkish Straits transit delays. The global tanker order book has fallen to 96 million deadweight tonnes, the lowest level since March 2006.

Dividend Guidance

The company provided a sensitivity table for the estimated Q4 2011 dividend based on spot rate assumptions. Estimated dividends range from $0.11 to $0.44 per share depending on Suezmax and Aframax spot rates, assuming fixed-rate contracts and scheduled drydockings.

Risks and Contingencies

• Goodwill Impairment: A $13.3 million non-cash charge was recorded, reducing the goodwill balance to nil. This does not affect cash flow or loan covenants.
• Derivative Accounting: Unrealized losses on interest rate swaps impacted GAAP earnings but do not affect Cash Available for Distribution.
• Market Volatility: Future results depend heavily on spot market rates, which are subject to supply/demand imbalances and geopolitical factors.

Investor Verification Checklist

• Fixed-Rate Coverage: Verify the 63% fixed-rate coverage for Q4 2011 and the specific terms of the new charters for Helga Spirit and Kyeema Spirit.
• Liquidity Composition: Confirm the breakdown of the $291.6 million liquidity ($14.1 million cash vs. $277.5 million undrawn credit facility).
• Goodwill Impairment: Review the rationale for the $13.3 million non-cash charge and confirm it has no impact on debt covenants.
• Dividend Policy: Assess the company's ability to maintain dividends if spot rates remain below the $10,000-$15,000 per day range indicated in the Q4 sensitivity table.
• Debt Obligations: Monitor the scheduled principal payments and the status of the two VLCC newbuilding loans secured by first-priority ship mortgages.