TNK

Business Context and Reporting Period

Company: Teekay Tankers Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2011
Business Overview: The Company owns and operates oil tankers, employing a chartering strategy that utilizes fixed-rate time charters to mitigate downside risk while capturing upside opportunities in the spot market. As of May 1, 2011, the fleet consisted of nine Aframax tankers, six Suezmax tankers, and a 50% interest in one VLCC newbuilding.

Key Financial Metrics

Note: Q1 2010 figures include restatements for the "Dropdown Predecessor" vessels to reflect common control accounting.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by approximately 19% to $31.7 million, driven by lower Time Charter Equivalent (TCE) rates in the spot market and fewer revenue days due to the sale of two vessels (Falster Spirit and Sotra Spirit) in 2010. This was partially offset by $2.8 million in interest income from term loan investments.
• Profitability Increase: Despite lower revenues, Net Income increased by 7% to $7.1 million. This was primarily due to a significant improvement in derivative instrument results (a $4.5 million gain in 2011 vs. a $2.7 million loss in 2010) and reduced interest expenses.
• Debt Reduction: Total debt decreased by approximately $103 million. The Company utilized net proceeds from a February 2011 public equity offering to prepay a substantial portion of its revolving credit facility.
• Expense Management: Vessel operating expenses decreased by 19% and interest expense decreased by 40%, largely due to the reduction in the vessel fleet size and the removal of Dropdown Predecessor allocated expenses.

Guidance, Outlook, and Risks

Market Outlook: Management notes that while crude tanker freight rates improved slightly in Q1 2011, they remain weak due to vessel oversupply. Factors supporting rates include rising global oil demand (projected 1.6% growth in 2011), supply disruptions in Libya, and increased fuel imports to Japan following the March earthquake.

Capital Strategy: The Company intends to distribute all "Cash Available for Distribution" as quarterly dividends. A dividend of $0.25 per share was declared on May 11, 2011, for the Q1 2011 period.

Risks and Contingencies:

• Market Risk: Exposure to fluctuations in spot tanker rates, interest rates, and foreign currency exchange rates (CAD, EUR, GBP, NOK).
• Derivative Risk: The Company uses interest rate swaps to hedge floating-rate debt. These are not designated as cash flow hedges, meaning fair value changes flow directly to the income statement, creating volatility in reported earnings.
• Contractual Obligations: The Company has $39.2 million in remaining commitments for a 50% interest in a VLCC newbuilding, with payments due in 2012 and 2013.

Investor Verification Checklist

• Equity Offering Impact: Verify the dilution effect of the 9.9 million shares issued in February 2011 and the subsequent debt prepayment.
• Derivative Volatility: Assess the sustainability of the $4.5 million gain on derivatives, as this significantly boosted net income despite lower operating revenues.
• Debt Covenants: Confirm continued compliance with the Tranche A Revolver covenants, specifically the minimum liquidity requirement of $35.0 million.
• Fleet Composition: Review the expiration dates of time-charter contracts (three expiring in 2011, five in 2012) to gauge exposure to spot market rates in the near term.
• Dividend Sustainability: Evaluate the "Cash Available for Distribution" metric against the declared dividend of $0.25 per share to ensure coverage.