TEEKAY TANKERS LTD. annual report, Q4 FY2020

Teekay Tankers Ltd. — FY2020 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly results are not separately presented in the supplied text. Teekay Tankers owns and operates crude-oil and product tankers, with significant exposure to spot tanker markets, supplemented by fixed-rate time charters, U.S. Gulf full-service lightering, ship-to-ship support, and vessel-management services. The company reports under U.S. GAAP.

Financial performance and operating metrics

Metric	2020	2019	Change
Revenue	$886.4 million	$943.9 million	Down 6%
Net revenue	$589.2 million	$541.6 million	Up 9%
Income from operations	$141.6 million	$123.9 million	Up 14%
Net income	$87.3 million	$41.4 million	Up 111%
Diluted EPS	$2.57	$1.23	Up 109%
EBITDA	$262.1 million	$250.0 million	Up 5%
Adjusted EBITDA	$335.6 million	$260.2 million	Up 29%
Operating cash flow	$347.9 million	$117.7 million	Up $230.3 million
Cash dividends declared	None	None	No change

Margins: Income from operations as a percentage of revenue was approximately 16.0%, compared with 13.1% in 2019. Net income margin was approximately 9.8%, compared with 4.4% in 2019. Net revenue, a non-GAAP measure, increased primarily because of stronger Suezmax and LR2 spot rates and greater time-charter-out activity.

Average total tanker TCE rate increased to $28,402 per revenue day from $23,055 in 2019.
Approximately 74.3% of 2020 net revenue came from spot-market operations, versus 86.8% in 2019, increasing exposure to freight-rate volatility despite the greater use of time charters.
Voyage expenses fell to $297.2 million from $402.3 million, while vessel operating expenses declined to $184.2 million from $208.6 million.
Interest expense declined to $51.5 million from $65.4 million, primarily due to debt repayments, refinancing, and lower LIBOR.

Balance sheet, debt and liquidity

Cash and cash equivalents were $97.2 million at December 31, 2020, compared with $88.8 million a year earlier. Including restricted cash, total cash was $103.1 million.
Total debt, including finance-lease obligations, was $613.0 million, down from $1.024 billion. Consolidated balance-sheet debt consisted of $243.0 million of long-term debt, including current maturities, $10.0 million of short-term debt, and $360.0 million of finance-lease obligations.
Total equity increased to $1.079 billion from $989.9 million, while total assets declined to $1.840 billion from $2.229 billion.
Total liquidity, including cash and undrawn facilities, was $372.6 million at year-end, compared with $150.3 million in 2019. This included $253.4 million undrawn under the revolving credit facility and $32.0 million available under the working-capital facility.
In January 2020, the company entered into a $532.8 million revolving facility maturing in December 2024. In August 2020, it entered into a $67.4 million term loan maturing in August 2023. Teekay Corporation no longer guarantees the company’s debt facilities following the refinancing.
Debt and finance-lease covenants were satisfied at December 31, 2020, including vessel-value and liquidity requirements.
Contractual obligations totaled approximately $678.6 million, including $181.9 million of debt repayments at maturity, $360.0 million of finance-lease repayments, and $59.0 million of charter-in commitments, excluding certain interest and option-related amounts.

Material changes versus 2019

The tanker market was strong in the first half of 2020 because of floating-storage demand, high oil production, and inventory accumulation, but weakened materially in the second half as OPEC+ production cuts reduced cargo volumes and vessels returned from floating storage.
Net revenue benefited from higher Suezmax and LR2 spot rates and increased time-charter revenue, partially offset by weaker Aframax rates, vessel sales, and lower full-service lightering earnings.
The company recorded $72.5 million of write-downs and asset-sale losses, including $65.4 million of impairments on nine Aframax tankers and $2.9 million of impairments on operating lease right-of-use assets. The comparable 2019 charge was $5.5 million.
Operating cash flow improved substantially because of higher operating earnings, favorable working-capital movements, and lower dry-docking cash outlays.
Financing cash outflows increased to $416.1 million, reflecting substantial debt repayments, working-capital facility repayments, and the repurchase of two Aframax tankers from sale-leaseback arrangements.
The company sold three Suezmax tankers for approximately $60.9 million and sold its non-U.S. ship-to-ship and LNG terminal-management businesses for approximately $27.1 million, recognizing a $3.1 million gain.
Dividend payments remain discretionary. The company eliminated its minimum quarterly dividend in 2018 and its prior formulaic dividend policy in 2019 to prioritize deleveraging and reducing its cost of capital.

Guidance, outlook, commentary and unusual items

Management expected tanker demand to recover gradually during 2021 as oil demand increased, inventories normalized, and vaccine programs expanded, but identified the timing of recovery as uncertain and dependent on the COVID-19 pandemic.
Management viewed fleet-supply fundamentals favorably because of limited newbuilding orders, a declining orderbook, and potential increased scrapping of older vessels. Near-term tanker rates were nevertheless expected to remain challenging.
The company reported no material business interruption from COVID-19 during 2020, but COVID-19 contributed to lower spot and short-term time-charter rates, higher crew-related costs, vessel impairments, and potential counterparty and liquidity risks.
The company adopted compliant low-sulfur fuel under IMO 2020 and had not installed scrubbers. It expected higher fuel costs to be largely recoverable from voyage-charter customers, although fuel-price spreads remain uncertain.
Eight vessel repurchase options totaling $185.5 million were expected to be exercised during 2021: two Suezmax vessels for $56.7 million in May 2021 and six Aframax vessels for $128.8 million in September 2021. Management expected to refinance these purchases and stated that sufficient liquidity for at least one year depended partly on completing such refinancing.
Two Aframax tankers were sold in March 2021 for an aggregate $32.0 million after being classified as held for sale at year-end.
Management identified vessel impairment as a significant estimate. A 5% reduction in the assumed long-term charter-rate average could have resulted in additional impairment of approximately $136.1 million for certain vessels; a 10% reduction could have resulted in approximately $220.3 million of additional impairment.
The company had $49.1 million of unrecognized tax benefits at year-end. A 2020 agreement with a tax authority reduced freight-tax liabilities by $15.2 million, while other uncertain tax positions increased.

Principal risks and contingencies

High spot-market exposure creates substantial sensitivity to tanker rates, oil demand, OPEC+ production decisions, refinery utilization, inventory levels, and floating-storage activity.
Further declines in vessel values could trigger impairment charges, additional collateral requirements, mandatory debt prepayments, or defaults under vessel-value covenants.
Liquidity depends on volatile operating cash flow and refinancing of vessel repurchase obligations. Failure to refinance could constrain operations, capital expenditures, or dividends.
COVID-19 effects, crew changes, port restrictions, dry-docking delays, customer credit deterioration, and future variants remain uncertain.
Interest-rate exposure remains material because debt is primarily LIBOR-based. The company had a $50.0 million interest-rate swap with a fixed rate of approximately 0.76% and recognized a $2.2 million net derivative loss in 2020.
Environmental, ballast-water, emissions, fuel-sulfur, greenhouse-gas, ship-recycling, and ESG requirements may increase capital and operating costs or reduce demand for oil transportation.
Marine accidents, pollution, piracy, terrorism, sanctions, cyberattacks, insurance limitations, and geopolitical disruptions could materially affect operations.
Teekay Corporation controlled approximately 53.9% of voting power and provides management services. Related-party arrangements, business-opportunity waivers, and the dual-class structure may limit Class A shareholders’ influence.

Investor verification checklist

Verify the timing, terms, and financing of the eight 2021 vessel repurchases totaling $185.5 million and their effect on liquidity and leverage.
Monitor spot tanker rates, TCE rates, vessel utilization, and the proportion of revenue exposed to spot markets.
Reassess vessel impairment sensitivity, particularly the 18 vessels whose undiscounted cash flows were only marginally above carrying value.
Confirm compliance with vessel-value, liquidity, and other debt and finance-lease covenants after the 2021 vessel transactions.
Review the transition away from LIBOR and the potential effect on borrowing costs and derivative agreements.
Track COVID-19 effects on oil demand, crew costs, port operations, customer credit, and tanker rates.
Assess the company’s ability to resume dividends, recognizing that payments are entirely subject to Board discretion and financing restrictions.