Business Context and Reporting Period
Company: Teekay Tankers Ltd. (NYSE: TNK)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2017
Report Date: February 22, 2018
Teekay Tankers operates a fleet of conventional oil tankers, including Suezmax, Aframax, and LR2 product tankers. The reporting period was significantly impacted by the strategic merger with Tanker Investments Ltd. (TIL) completed on November 27, 2017, which expanded the fleet to 58 conventional tankers. The company also executed a $270 million debt refinancing for 14 former-TIL vessels.
Key Financial Metrics
| Metric (in thousands USD) | Q4 2017 | Q4 2016 | Full Year 2017 | Full Year 2016 |
|---|---|---|---|---|
| Total Revenues | $105,229 | $123,194 | $431,178 | $550,543 |
| GAAP Net (Loss) Income | $(1,879) | $9,080 | $(58,023) | $67,823 |
| GAAP EPS (Basic) | $(0.01) | $0.05 | $(0.31) | $0.40 |
| Adjusted Net (Loss) Income (Non-GAAP) | $(5,939) | $5,104 | $(19,945) | $81,187 |
| Cash Flow from Vessel Ops (Non-GAAP) | $32,134 | $43,127 | $123,138 | $233,237 |
| Free Cash Flow (Non-GAAP) | $22,859 | $34,207 | $87,875 | $186,665 |
| Liquidity (Cash + Undrawn Credit) | $161.7 million | N/A | N/A | N/A |
Note: Liquidity as of December 31, 2017, comprised $71.4 million in cash and cash equivalents and $90.3 million in undrawn revolving credit facilities.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 14.6% in Q4 2017 compared to Q4 2016, and 21.7% for the full year 2017. This was primarily driven by lower average spot tanker rates and the impact of OPEC supply cuts reducing cargo volumes.
- Profitability Shift: The company reported a GAAP net loss for both Q4 and the full year 2017, contrasting with net income in the comparable 2016 periods. The Q4 2016 results included a write-down of two Suezmax tankers, which improved the relative GAAP performance of Q4 2017.
- Fleet Expansion: The merger with TIL added 18 vessels to the fleet, increasing the total conventional fleet to 58 vessels. This expansion is reflected in the increased weighted average shares outstanding (212.1 million in Q4 2017 vs. 170.5 million in Q4 2016).
- Debt Structure: A new five-year $270 million debt facility was secured to refinance 14 vessels, extending maturities to 2022 and reducing interest expense.
Guidance, Outlook, and Management Commentary
Market Outlook
Management expects the tanker market to remain challenging in the near term due to ongoing OPEC supply cuts and the need to absorb recent fleet growth. However, a recovery is anticipated in the latter part of 2018 and into 2019, driven by:
- Supply Constraints: Elevated tanker scrapping (11.5 mdwt in 2017) and reduced newbuild deliveries are expected to slow fleet growth to ~3% in 2018 and ~2% in 2019.
- Demand Growth: Global oil demand is estimated to grow by 1.5 mb/d in 2018. Increased U.S. crude exports (reaching 10 mb/d production) are expected to support mid-size tanker demand.
- Inventory Dynamics: Rapid inventory drawdowns may force OPEC to exit supply agreements sooner than expected, potentially benefiting the mid-size tanker market.
Dividend Policy
The company declared a cash dividend of $0.03 per share for Q4 2017, representing the minimum quarterly dividend under its current policy.
Risks and Contingencies
- Market Volatility: Crude tanker spot rates did not experience the typical winter seasonal spike in Q4 2017 due to lower OPEC production and lack of weather delays.
- Cost Pressures: Rising bunker fuel costs due to higher crude oil prices (approaching $70/barrel) are impacting operating margins.
- Forward-Looking Statements: Actual results may differ due to changes in oil production/demand, trading patterns, newbuilding orders, and regulatory changes.
Investor Verification Checklist
- Merger Integration: Verify the operational integration of the 18 vessels acquired from TIL and the impact on fleet utilization rates.
- Debt Covenants: Review the specific terms of the new $270 million refinancing to confirm the reduction in interest expense and alignment with standard covenants.
- Non-GAAP Reconciliations: Examine the reconciliations in Appendices A, B, and C to understand the adjustments made to GAAP net income to arrive at Adjusted Net Income and Free Cash Flow, particularly regarding the $28.1 million impairment of the TIL equity investment.
- Spot Rate Exposure: Assess the proportion of the fleet trading on spot rates versus fixed time charters to gauge exposure to future market volatility.
- Liquidity Position: Confirm the availability of the $90.3 million undrawn revolving credit facility and its impact on the company's ability to service debt and pay dividends.