TNK

Business Context and Reporting Period

Company: Teekay Tankers Ltd. (NYSE: TNK)
Filing Type: Form 6-K (Earnings Release)
Reporting Period: Second Quarter ended June 30, 2013 (and six months ended June 30, 2013)
Date of Report: August 8, 2013

Teekay Tankers operates a fleet of double-hull tankers, including Aframax, Suezmax, LR2, and MR product tankers, alongside a 50% interest in a VLCC. The company manages its fleet through a mix of fixed-rate time-charter contracts and spot market trading.

Key Financial Metrics

Note: Liquidity as of June 30, 2013, consisted of $37.7 million in cash and $217.8 million in an undrawn revolving credit facility.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 19.4% year-over-year in Q2 2013 ($41.0M vs. $50.9M) due to the expiry of fixed-rate charters and lower realized spot rates.
• Profitability Shift: The company reported an adjusted net loss of $6.3 million in Q2 2013, compared to an adjusted net income of $0.9 million in Q2 2012. This shift is primarily attributed to vessels moving from fixed rates to lower spot rates.
• Specific Items: A $4.5 million loss provision was recorded on investments in two term loans secured by VLCCs, where borrowers defaulted on interest payments in January 2013.
• Operating Cash Flow: Net operating cash flow for the six months ended June 30, 2013, was $17.9 million, compared to $8.4 million in the same period of 2012.

Guidance, Outlook, and Risks

Management Commentary

CEO Bruce Chan noted that lower spot rates and the expiry of in-the-money time charters reduced cash flows. However, the company maintained strong fixed-rate coverage of approximately 40% for the next 12 months by extending an Aframax time-charter at $15,150 per day (above spot rates).

Outlook and Strategy

• Dividend Policy: The company declared a fixed dividend of $0.03 per share for Q2 2013, marking the 23rd consecutive quarter of dividends since its IPO.
• VLCC Loan Recovery: Teekay Tankers took over management of two defaulting VLCCs in May 2013. One is trading in the spot market; the other is detained in Egypt. Management believes it is in a strong position to recover the investment.
• Newbuildings: Four LR2 product tankers were ordered from STX in April 2013. Payments are contingent on refund guarantees. STX recently completed a financial restructuring, but contract amendments may be required to secure guarantees. Teekay has not agreed to amendments and retains the right to cancel orders.

Risks and Contingencies

• Market Conditions: Crude tanker spot rates remain at historically low levels due to increased U.S. crude production and weak VLCC markets.
• STX Restructuring: Uncertainty regarding the issuance of refund guarantees for newbuilding orders could lead to contract cancellations or amendments.
• VLCC Detention: The release of the detained VLCC in Egypt depends on negotiations between insurers and authorities.

Investor Verification Checklist

• VLCC Loan Recovery: Verify the status of the detained VLCC in Egypt and the cash flow generation of the trading VLCC to assess the $4.5 million loss provision adequacy.
• STX Newbuilding Orders: Monitor the outcome of negotiations regarding refund guarantees for the four LR2 tankers and the potential for contract cancellation.
• Fixed-Rate Coverage: Confirm the 40% fixed-rate coverage forecast for the next 12 months and the specific terms of the extended Aframax charter.
• Liquidity Position: Review the $255.5 million liquidity figure and the absence of significant debt maturities until 2017 to assess financial stability during market downturns.
• Dividend Sustainability: Evaluate the $5.6 million Cash Available for Distribution against the fixed dividend obligation to ensure coverage in a low-rate environment.