TEEKAY TANKERS LTD. annual report, Q4 FY2012

Teekay Tankers Ltd. — FY2012 Form 20-F Summary

Business context and reporting period

Teekay Tankers is a Marshall Islands corporation providing international marine transportation of crude oil and refined petroleum products. Its fleet uses a mix of fixed-rate time charters and spot-market exposure, including the Gemini Suezmax, Teekay Aframax and Taurus Tankers LR2 pools managed by Teekay affiliates. The filing is an annual report for the fiscal year ended December 31, 2012, filed April 30, 2013; it is not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and include retroactively adjusted results for vessels acquired from Teekay under common control.

Key financial metrics

U.S. dollars, in thousands, except per-share data	2012	2011	Change
Total revenues	197,429	215,072	Down 8.2%
Net revenues	192,811	211,623	Down 8.9%
Loss from operations	(340,195)	(44,447)	Loss increased
Net loss	(370,181)	(113,075)	Loss increased
Basic and diluted loss per share	(4.54)	(0.15)	Worsened
Adjusted EBITDA	82,652	106,986	Down 22.7%
Net cash from operating activities	27,542	24,020	Up 14.7%
Cash and cash equivalents	26,341	18,566	Up 41.9%
Total debt	739,293	999,930	Down 26.1%
Total equity	302,183	578,164	Down 47.7%

Net revenues exclude voyage expenses and are a non-GAAP measure used by management and shipping analysts. Adjusted EBITDA excludes vessel-sale losses, goodwill impairment and derivative gains or losses. EBITDA and adjusted EBITDA should not be viewed as substitutes for GAAP income or cash flow.

Operating expenses totaled $537.6 million, including $352.5 million of vessel impairment and net loss on sale of vessels.
Vessel operating expenses rose to $89.2 million from $84.1 million, primarily due to higher unplanned repairs and maintenance.
Interest expense declined to $20.0 million from $40.5 million as debt levels and allocated predecessor interest costs declined.
Realized and unrealized derivative losses declined to $8.0 million from $27.8 million.
Average TCE rate declined to $18,091 per revenue day from $19,806, while revenue days were broadly stable at 10,363 versus 10,372.
Approximately 35.1% of 2012 net revenues came from spot-market or short-term voyage-charter activity, compared with 25.0% in 2011.

Material changes versus the prior comparable period

In June 2012, the company acquired 13 conventional and product tankers and related contracts from Teekay for approximately $454.2 million, including assumed debt of approximately $428.1 million. Consideration included 4.5 million Class A shares and a $1.1 million cash payment, and the results were presented retroactively under common-control accounting.
Fixed-rate time-charter revenue declined by approximately $32.3 million because of vessels changing employment and lower rates on rechartered vessels. Spot-rate revenue increased by approximately $14.4 million, principally from greater Suezmax pool participation and additional Aframax and LR2 revenue days.
The company recognized a $352.5 million impairment of seven Suezmax tankers, four Aframax tankers and one product tanker, compared with $58.0 million of vessel impairments and sale losses in 2011. The charges reflected weak tanker markets, delayed recovery expectations and competitive pressure from more fuel-efficient vessels.
Goodwill impairment was zero in 2012 versus $19.3 million in 2011.
Cash flow from operations improved modestly despite lower realized TCE rates, helped by the absence of a significant 2011 interest-rate-swap settlement payment and lower interest expense allocations.
The company issued 17.25 million Class A shares in February 2012 at $4.00 per share, generating $65.8 million of net proceeds, primarily used to repay debt. Shares outstanding increased to 83.6 million at year-end from 61.9 million.

Liquidity, debt and commitments

Total liquidity, including cash and undrawn committed credit facilities, was $327.3 million at December 31, 2012, compared with $324.3 million at December 31, 2011.
Long-term debt was $735.7 million, including $25.2 million due in 2013. Three revolving facilities provided aggregate commitments of approximately $856.4 million, of which $301.0 million was undrawn at year-end.
Contractual obligations totaled approximately $769.2 million, consisting primarily of $735.7 million of long-term debt, $6.5 million of chartered-in vessel obligations and $27.0 million for the company’s share of remaining VLCC newbuilding installments.
The company reported compliance with its debt covenants. However, several facilities contain vessel-value and liquidity requirements, and further weakness in tanker values could pressure loan-to-value ratios or require additional collateral.
Operating cash flow was $27.5 million, financing cash flow was negative $13.9 million and investing cash flow was negative $5.9 million. Dry-docking expenditures were $7.0 million.

Guidance, outlook, commentary and unusual items

Management described crude tanker rates as strengthening in the first half of 2012 but falling to historically low levels in the second half. Product tanker earnings improved in the second half, with LR2 rates reaching a three-year high in the fourth quarter.
Management estimated 2013 tanker fleet growth of approximately 3.5%, with growth concentrated in VLCC and Suezmax segments and negligible or declining growth in Aframax and LR2 segments. The filing cited external forecasts for 2013 oil-demand growth of approximately 0.9 million barrels per day.
Beginning in the first quarter of 2013, the company changed from distributing most cash available for distribution to a fixed quarterly dividend of $0.03 per share, or $0.12 annually, subject to board review and financing restrictions. A $0.03 per-share dividend related to the fourth quarter of 2012 was paid March 11, 2013.
The company held a 50% interest in a VLCC newbuilding expected to deliver in June 2013. In April 2013, it also agreed to construct four fuel-efficient LR2 tankers at approximately $47 million each, with options for up to 12 additional vessels and expected deliveries in late 2015 and early 2016.
The company held $115.0 million of term loans secured by two VLCCs. The borrower failed to pay the January 31, 2013 interest payment in full. Management expected recovery through borrower cash flow, parent support and collateral value, but a default or insufficient collateral could cause a material loss.
The company sold the Aframax tanker Nassau Spirit for $9.1 million on January 22, 2013 after classifying it as held for sale at year-end.

Principal risks and contingencies

Highly cyclical and volatile tanker rates, particularly because of spot-market exposure, may reduce revenues, earnings and debt-service capacity.
Vessel values may decline further, causing additional impairments or breaches of vessel-value covenants. At December 31, 2012, 16 vessels had market values below carrying values, with aggregate market values of $428.0 million versus carrying values of $638.0 million, although no additional impairment was recorded for those vessels.
Debt covenants restrict borrowing, asset sales, liens, investments and dividends. A covenant breach could accelerate repayment obligations and terminate undrawn commitments.
The company depends materially on Teekay Corporation for management, commercial pooling, financing support, services and business opportunities. Related-party arrangements and Teekay’s voting control may create conflicts of interest for Class A shareholders.
Pooling arrangements may produce lower earnings than independent operation and could be restricted by regulatory or antitrust developments.
Environmental, ballast-water, emissions, sulfur-fuel, pollution, piracy, terrorism, war and maritime casualty risks may increase costs or cause significant liabilities. Pollution insurance provides up to $1 billion per vessel per incident, but catastrophic losses could exceed coverage.
The company has foreign-currency exposure, floating-rate debt and interest-rate swaps. The swaps had aggregate principal amounts of $345.0 million and a combined fair-value liability of approximately $33.6 million at year-end.
U.S. tax authorities could challenge the company’s position that it qualifies for the Section 883 exemption or is not a passive foreign investment company.

Most important facts for an investor to verify

Whether tanker spot and time-charter rates recover sufficiently to support cash generation, vessel values and debt covenants.
The collectability and collateral coverage of the $115.0 million term-loan investment following the borrower’s missed interest payment.
Required debt amortization, revolving-facility availability and covenant headroom, particularly vessel-value and minimum-liquidity tests.
The sustainability of the $0.03 quarterly dividend after the shift away from the prior full-payout policy.
The assumptions supporting the $352.5 million vessel impairment and the risk of further impairments among vessels whose market values remain below carrying amounts.
Execution, financing and delivery timing for the VLCC and LR2 newbuildings, including the potential exercise of additional LR2 options.
The economic impact of related-party management and pool fees, Teekay’s control rights, and the expiration of the non-competition agreement in June 2015.