• Reported GAAP net loss of $19.9 million, or $0.07 per share, and adjusted net loss(1) of $21.2 million, or $0.08 per share, in the third quarter of 2019 (excluding items listed in Appendix A to this release).
• Total Adjusted EBITDA(1) of $27.8 million.
• Secured strong fourth quarter of 2019 to-date spot tanker rates of $38,000 and $30,500 on average per day for Teekay Tankers’ Suezmax and Aframax fleet, an increase of 133 percent and 105 percent, respectively, compared to the third quarter of 2019.
• Approximately 90 percent of Teekay Tankers’ fleet is currently trading in the spot tanker market; every $5,000 per day increase in spot tanker rates results in approximately $95 million, or $0.35 per share, in additional annual net income.
• Transitioning away from the current formulaic dividend policy to focus on delevering balance sheet, building net asset value, and reducing cost of capital (refer to CEO Commentary and Summary of Recent Events sections below for more details).
• Signed term sheet for a new 5-year, $595 million revolving credit facility to refinance a majority of Teekay Tankers’ fleet on substantially similar terms.
“As expected, crude spot tanker rates declined from the second to the third quarter of 2019, mainly due to normal seasonality,” commented Kevin Mackay, Teekay Tankers’ President and CEO. “Crude spot tanker rates subsequently began to firm in September 2019 on the back of stronger market fundamentals. Against that supportive fundamental backdrop, a series of market events in late-September and into October 2019 drove rates to the highest levels since the peak of the super cycle in 2008. Teekay Tankers has been able to benefit from this strengthening tanker market as evidenced by the strong Suezmax and Aframax tanker rates we have secured in the fourth quarter of 2019 to-date, which have so far averaged approximately 133 percent and 105 percent higher than rates we earned in the third quarter of 2019, respectively. Looking ahead, as the strong underlying supply and demand fundamentals persist, we continue to have a positive view of the tanker market into the winter months and 2020.”
“Last year and in early-2019, after consideration of various alternatives, Teekay Tankers entered into several higher-cost sale-leaseback transactions to bolster its liquidity position during a period of pronounced weakness in the tanker market, which enabled us to avoid issuing dilutive common equity or selling assets at less than optimal trough valuations, but resulted in increasing our balance sheet leverage and our overall cost of capital. Therefore, we believe that the most prudent and accretive allocation of our capital at this time is to transition away from our current earnings-based formulaic dividend policy and to instead allocate our growing cash flows towards reducing our financial leverage, which will further build net asset value and reduce our cost of capital. We also believe that having a strong balance sheet should help to narrow the valuation gap between our share price and our net asset value, which would further contribute directly to shareholder returns,” continued Mr. Mackay. “As our balance sheet delevers, Teekay Tankers believes that it will ultimately have greater financial flexibility to allocate capital towards a variety of uses, including returning capital to shareholders through dividends and/or share repurchases and potential vessel acquisitions at attractive times in the tanker cycle. However, given our current strong market position and significant operating leverage, we do not intend to acquire vessels at this time but instead, may seek to crystallize vessel values and further accelerate our balance sheet delevering by opportunistically selling some of our existing assets as values continue to strengthen.”
Mr. Mackay added, “To improve the marketability of Teekay Tankers’ shares to a broader base of potential investors, we have decided to increase the market price of the Company’s common shares through a one-for-eight reverse stock split. This change is expected to take effect at the opening of the market on November 25, 2019.”
With regard to the IMO 2020 regulations, Mr. Mackay highlighted, “On January 1, 2020, the shipping industry will move to a new emissions standard based on 0.5 percent sulphur fuel. Teekay Tankers fully supports the use of cleaner burning fuels across the industry as it aligns directly with our core value of Sustainability. Our journey towards ensuring compliance with these new regulations has been three years in the making and having commenced purchasing these lower sulphur, cleaner burning fuels in recent weeks, we are confident that our extensive preparations will result in a seamless transition to operating with the new fuel standard.”
“With significant operating leverage, expected increases in asset values and the potential to close the valuation gap, we believe that Teekay Tankers is one of the best positioned companies in our sector to create shareholder value both in the near-term and over time. We look forward to presenting at our Teekay Group investor and analyst meeting tomorrow morning starting at 8:30 am in New York, which will include more in-depth discussions on our strategy and financial position, our views on the tanker market, and our IMO 2020 preparations.”
Summary of Recent Events
In October 2019, Teekay Tankers entered into one-year time charter-out contracts for three Suezmax tankers at an average rate of approximately $37,500 per day, two of which commenced in mid-October 2019 and one in early-November 2019.
In November 2019, the Company made the determination to transition away from its previous formulaic dividend policy, which was based on a payout of 30 to 50 percent of its quarterly adjusted net income, to primarily focus on building net asset value through balance sheet delevering and reducing its cost of capital. As Teekay Tankers’ balance sheet delevers, the Company believes that it will ultimately have greater financial flexibility to allocate capital towards a variety of uses, including returning capital to shareholders through dividends and/or share repurchases and potential vessel acquisitions at attractive times in the tanker cycle.
Also in November 2019, Teekay Tankers’ Board of Directors determined to effect a one-for-eight reverse stock split of the Company’s Class A common shares, par value $0.01 per share, and Class B common shares, par value $0.01 per share, which will be approved by its controlling shareholder, Teekay Corporation. The reverse stock split is expected to take effect, and the Company’s Class A common shares are expected to begin trading on a split-adjusted basis on the New York Stock Exchange (NYSE), as of the opening of trading on November 25, 2019.? The trading symbol for the Company’s Class A common shares will remain “TNK.” The CUSIP number of Y8565N 300 will be assigned to the Company’s Class A common shares when the reverse stock split becomes effective. When the reverse stock split becomes effective, every eight of the Company’s issued common shares will be combined into one issued common share, without any change to the par value per share.? This will reduce the number of outstanding Class A and B common shares from approximately 232.0 million and 37.0 million to approximately 29.0 million and 4.6 million, respectively. No fractional shares will be issued in connection with the reverse stock split.? Shareholders who would otherwise hold a fraction of a common share of the Company will be entitled to receive a cash payment in lieu thereof at a price equal to that fraction of a share to which the shareholder would otherwise be entitled, multiplied by the closing price of the Company’s Class A common shares on the NYSE on November 22, 2019. Shareholders with shares held in book-entry form or through a bank, broker, or other nominee are not required to take any action and will see the impact of the reverse stock split reflected in their accounts on or after November 25, 2019.? Such beneficial holders may contact their bank, broker, or nominee for more information.
In November 2019, the Company signed a term sheet to refinance 36 vessels with a new 5-year, $595 million revolving credit facility. When completed, the facility will replace three of Teekay Tankers’ existing loan facilities that currently have an aggregate availability of $510 million, of which $495 million was drawn. The new facility, which will have substantially similar terms and will extend balloon maturities from 2020/2021 until late-2024, is expected to be completed in December 2019.
Crude tanker spot rates declined during the third quarter of 2019 compared to the second quarter of 2019. This was primarily due to reduced refinery throughput as a result of extended seasonal maintenance to prepare for the implementation of IMO 2020, high tanker fleet growth through the first nine months of 2019, and the impact of continued OPEC oil supply cuts.
Crude tanker spot rates started firming in September 2019 on the back of tighter market fundamentals prior to spiking in late-September and into October 2019 to the highest level since the peak of the super cycle in 2008. The recent volatility in crude tanker spot rates has been driven by a combination of firm underlying supply and demand fundamentals and a series of other events, which have significantly increased tanker fleet utilization. Factors that have driven tanker fleet utilization higher include:
• Increase in global refinery throughput – According to the International Energy Agency, global refinery throughput is expected to increase by 0.6 million barrels per day (mb/d) quarter-on-quarter in the fourth quarter of 2019, and by 1.1 mb/d year-on-year. This could be further supported by the upcoming IMO 2020 regulations and the need for refiners to increase throughput in order to produce sufficient low sulphur fuel for the marine bunker market.
• Increase in crude tanker tonne-miles as a result of longer voyage distances – This has been primarily due to an increase in crude oil movements from the Atlantic basin to Asia, driven by the rise in U.S. crude oil exports. U.S. crude oil exports have averaged 2.9 mb/d in 2019 year-to-date vs. 2.0 mb/d in 2018 and are expected to rise further as new pipeline capacity is brought online linking the Permian basin to the U.S. Gulf coast. In October 2019, U.S. crude oil exports have been averaging 3.4 mb/d as a result of new pipeline capacity coming online, including the Cactus II and EPIC pipelines which began operations in the third quarter of 2019.
• Geopolitical instability in the Middle East region – Following the attacks on Saudi Arabian oil infrastructure on September 14, 2019, Asian buyers have been diversifying their sources of oil supply away from the Middle East, which has further added to the increase in crude oil movements from West to East.
• Increase in floating storage as a result of IMO 2020 – More than 20 VLCCs are currently being used to store compliant fuels ahead of the new regulations coming into force on January 1, 2020, particularly off Singapore. This is tying up a significant portion of the VLCC fleet and tightening available fleet supply.
• Slowdown in tanker fleet growth – Global fleet growth in the first nine months of the year was relatively high with net fleet growth of 28 million deadweight tonnes (mdwt), or 4.7 percent. This pace of growth is set to slow considerably with just 7 mid-size tankers scheduled to deliver in the remainder of the year and 44 vessels scheduled to deliver in 2020 (versus 75 deliveries in the first nine months of 2019). As a result, the Company estimates that global tanker fleet growth will fall to approximately 2 percent in 2020 versus expected growth of 5 percent in 2019.
• Drydocking of ships for scrubber installation – Recent weeks have seen an increase in the number of vessels in the global fleet heading into drydock for the installation of scrubbers ahead of IMO 2020, peaking at close to 9 mdwt of capacity during the third quarter of 2019. This has further squeezed available fleet supply, and will continue to do so in the coming weeks as ship owners look to install scrubbers ahead of the January 1, 2020 implementation date.
These factors have significantly tightened the crude tanker supply / demand balance with the consequence that any near-term disruptions are likely to give rise to significant tanker rate volatility. This point was evidenced at the start of October 2019 when U.S. sanctions on two subsidiaries of leading Chinese state-owned shipping and logistics company COSCO removed up to 50 VLCCs from the spot tanker market and charterers scrambled for replacement tonnage. This led to an extremely sharp spike in crude spot tanker rates in a very short period of time. Crude spot tanker rates have since come off the extreme highs, but remain at firm levels compared to the third quarter of 2019. This illustrates that the tanker market is very tight at the moment and that periods of rate volatility can be expected in the coming months, particularly during the winter when weather-related vessel delays are typical.
Given the above, the tanker market fundamentals are expected to be strong through the upcoming winter months and into 2020 on the back of firm tanker tonne-mile demand, low fleet growth over the next two years, and supportive near-term factors, including the impact of IMO 2020 and geopolitical factors.
Sea News, November 15