Teekay Tankers Ltd. Reports Second Quarter 2014 Results

Highlights

• Reported second quarter 2014 adjusted net loss attributable to shareholders of Teekay Tankers of $4.1 million, or loss of $0.05 per share (excluding specific items which increased GAAP net income by $8.7 million, or $0.10 per share).
• Generated Cash Available for Distribution (CAD) of $0.11 per share.
• Realized a $10 million gain on the sale of two Very Large Crude Carriers (VLCC) vessels in the second quarter of 2014. As a result of this transaction, Teekay Tankers’ total liquidity increased to $250 million as of June 30, 2014.
• Secured time charter-in contracts for two Aframax tankers and four Long Range 2 (LR2) product tankers in the second quarter of 2014, bringing the total in-charter fleet to eight vessels.
• On August 1, 2014, Teekay Tankers completed the acquisition of a 50 percent ownership interest in Teekay Corporation’s commercial and technical management operations (Teekay Operations) for approximately $15 million.
• In July 2014, experienced the highest Suezmax and Aframax spot tanker rates for the month of July since 2008.

Teekay Tankers Ltd. (Teekay Tankers or the Company) (TNK) today reported adjusted net loss attributable to shareholders of Teekay Tankers(1) (as detailed in Appendix A to this release) of $4.1 million, or loss of $0.05 per share, for the quarter ended June 30, 2014, compared to adjusted net loss attributable to shareholders of Teekay Tankers of $6.3 million, or $0.08 per share, for the same period in the prior year. The decrease in adjusted net loss attributable to shareholders of Teekay Tankers is primarily due to stronger spot tanker rates in the second quarter of 2014 as compared to the same period in the prior year, partially offset by a decrease in recognized interest income as a result of the monetization of the Company’s investment in term loans in March 2014. Adjusted net loss attributable to shareholders of Teekay Tankers excludes a number of specific items that had the net effect of increasing net income attributable to shareholders of Teekay Tankers by $8.7 million, or $0.10 per share, for the three months ended June 30, 2014 and decreasing net loss attributed to shareholders of Teekay Tankers by $0.6 million, or $0.01 per share, for the three months ended June 30, 2013, as detailed in Appendix A to this release. Including these items, the Company reported, on a GAAP basis, net income attributable to shareholders of Teekay Tankers of $4.6 million, or $0.05 per share, for the quarter ended June 30, 2014, compared to a net loss attributable to shareholders of Teekay Tankers of $5.7 million, or $0.07 per share, for the quarter ended June 30, 2013. Net revenues(2) were $40.8 million and $41.0 million for the quarters ended June 30, 2014 and June 30, 2013, respectively.

For the six months ended June 30, 2014, the Company reported adjusted net income attributable to shareholders of Teekay Tankers of $12.8 million, or $0.15 per share, compared to adjusted net loss attributed to the shareholders of Teekay Tankers of $9.9 million, or $0.12 per share, for the same period in the prior year. The increase in adjusted net income attributable to shareholders of Teekay Tankers is primarily due to the stronger spot tanker rates for the first six months of 2014 compared to the same period in the prior year and an increase in interest income recognized from the Company’s investment in term loans, which concluded in March 2014. Adjusted net income attributable to shareholders of Teekay Tankers excludes a number of specific items that had the net effect of increasing net income attributable to shareholders of Teekay Tankers by $18.3 million, or $0.22 per share, and decreasing the net loss by $2.2 million or $0.03 per share, for the six month periods ended June 30, 2014 and June 30, 2013, respectively, as detailed in Appendix A to this release. Including these items, the Company reported, on a GAAP basis, net income attributable to shareholders of Teekay Tankers of $31.0 million, or $0.37 per share, for the six months ended June 30, 2014, compared to net loss attributable to shareholders of Teekay Tankers of $7.7 million, or $0.09 per share, for the six months ended June 30, 2013. Net revenues(2) were $101.1 million and $83.1 million for the six months ended June 30, 2014 and June 30, 2013, respectively.

During the second quarter of 2014, the Company generated $9.2 million, or $0.11 per share, of Cash Available for Distribution(3), compared to $5.6 million, or $0.07 per share, in the second quarter of 2013 due to the reasons noted above. On July 3, 2014, Teekay Tankers declared a dividend of $0.03 per share for the second quarter of 2014, which was paid on July 31, 2014 to all shareholders of record on July 18, 2014. Since the Company’s initial public offering in December 2007, it has declared dividends in 27 consecutive quarters, which now total $7.365 per share on a cumulative basis.

“As we head into the mid-point of the third quarter of 2014, there has been a significant increase in crude spot tanker rates in recent weeks which has resulted in the highest quarter-to-date third quarter spot rates in the Suezmax and Aframax segments since 2008,” commented Kevin Mackay, Chief Executive Officer of Teekay Tankers. “The increase in spot rates is primarily due to an increase in long-haul Suezmax movements from the Atlantic to Pacific, the end of seasonal refinery maintenance, stockpiling due to continued unrest in Iraq, and vessel delays at U.S. Gulf and Mediterranean ports. While we expect rates to soften from the current high levels, we believe that stronger oil demand, limited tanker fleet growth and improving global economic conditions will continue to support a general firming of average spot tanker rates.”

“Based on our outlook for the tanker market and expected higher volatility in rates, we have been actively increasing Teekay Tankers’ spot rate exposure through new in-charter contracts with favorable rates and optional periods,” Mr. Mackay continued. “In addition to the six vessels we have recently in-chartered, as some of our owned vessels currently operating under fixed-rate employment contracts redeliver, we plan to trade more of these vessels in the spot tanker market rather than pursue replacement fixed-rate contracts. With this shift from fixed-rate coverage to increased spot exposure, our fixed-rate coverage for the next 12 months has reduced to 26 percent, down from almost 50 percent a couple years ago, which we believe will allow Teekay Tankers to benefit from any additional spikes in the spot market as we move into the second half of 2014.”

Mr. Mackay added, “With the finalization of our 50 percent acquisition of Teekay Operations, Teekay Tankers is evolving into a full-service conventional tanker platform, which we believe will allow us to better serve our customers and generate greater value for our shareholders. Combined with an expected overall firming in spot tankers rates and our shift towards increased spot rate employment, we believe that the additional fee revenue from our ownership in Teekay Operations will further position Teekay Tankers to benefit from a sustained tanker market recovery.”
(1) Adjusted net (loss) income attributable to shareholders of Teekay Tankers is a non-GAAP financial measure. Please refer to Appendix A to this release for a reconciliation of this non-GAAP measure as used in this release to the most directly comparable financial measure under United States generally accepted accounting principles (GAAP) and for information about specific items affecting net (loss) income that are typically excluded by securities analysts in their published estimates of the Company’s financial results.
(2) Net revenues is a non-GAAP financial measure used by certain investors to measure the financial performance of shipping companies. Please refer to Appendix C included in this release for a reconciliation of this non-GAAP measure to the most directly comparable financial measure under GAAP.
(3) Cash Available for Distribution represents net income (loss), plus depreciation and amortization, unrealized losses from derivatives, non-cash items and any write-offs or other non-recurring items, less unrealized gains from derivatives and other non-cash items. Please refer to Appendix B to this release for a reconciliation of Cash Available for Distribution (a non-GAAP measure) as used in this release to the most directly comparable GAAP financial measure.

Summary of Recent Developments

Completed the Acquisition of Teekay’s Commercial and Technical Operations

On August 1, 2014, Teekay Tankers’ completed the acquisition of a 50 percent ownership interest in Teekay Corporation’s commercial and technical management operations (Teekay Operations) for approximately $15 million. Consideration for the transaction was paid in shares of Teekay Tankers at a price of $3.70 per share, which represents the trailing 20-day volume-weighted average price at the time of the agreement. Teekay Operations includes direct ownership in three commercially managed tanker pools, which currently generate income from commercially managing a fleet of 84 vessels, and direct ownership in Teekay Marine Limited, which currently generates income from technically managing a fleet of 53 vessels, including vessels owned by the Company.

Fixed-Rate Time Charter Coverage

During the second quarter of 2014, Teekay Tankers secured time charter-in contracts for two Aframax vessels and four Long Range 2 (LR2) product tanker vessels which increased Teekay Tankers’ total time charter-in fleet to eight vessels. The new time charter-in contracts have an average daily rate of $15,600 for the Aframax vessels and $15,975 for the LR2 product tanker vessels.

Tanker Market

Crude tanker spot rates in the second quarter of 2014 averaged approximately 20 to 30 percent higher compared to the same period of 2013, reflecting improving tanker market fundamentals and higher fleet utilization compared to the previous year.

Since the beginning of the third quarter of 2014, Aframax and Suezmax spot rates experienced a counter-seasonal rally to the highest levels seen in the month of July since 2008. The third quarter rate spike was primarily due to refinery throughput increasing as seasonal refinery maintenance concluded, coupled with an increase in long-haul Suezmax movements from the Atlantic to Pacific, fear-driven stockpiling due to uncertainty caused by unrest in Iraq, and vessel delays at U.S. Gulf and Mediterranean ports. This significant increase in tanker rates during what is usually a weak part of the year for crude tankers, is a further sign of improving tanker market fundamentals and is a positive signal ahead of the seasonally stronger winter market, which begins in the fourth quarter.

Long Range 2 (LR2) product tanker rates strengthened in the early part of the second quarter due to higher naphtha exports from the Middle East and Europe to Asia before declining in June due to increased competition from cheaper liquefied petroleum gas. Medium Range (MR) product tanker spot rates weakened during the second quarter of 2014 due to a combination of lower U.S. export volumes and the impact of new fleet supply growth.

The global tanker fleet grew by 2.6 million deadweight tonnes (mdwt), or 0.5 percent, in the first half of 2014 compared to 10.8 mdwt, or 2.2 percent, in the same period of 2013. A significant portion of this fleet growth occurred in the MR product tanker sector while the world Suezmax and Aframax crude tanker fleets shrank by a net two vessels, or 0.4 percent, and 13 vessels, or 2.1 percent, respectively, during the first six months of 2014. Taking into account newbuilding orderbook slippage and scrapping, the world tanker fleet is forecasted to grow by approximately 1.2 percent in 2014, the lowest level of tanker fleet growth since 2001, and by approximately 1.6 percent in 2015. The mid-size tanker fleet is forecasted to further reduce in size during the second half of 2014 and into 2015 as scrapping of older vessels is expected to outweigh new deliveries into the fleet.

In its July 2014 “World Economic Outlook Update,” the International Monetary Fund revised its outlook for global GDP growth in 2014 downward from 3.7 percent to 3.4 percent, with global GDP growth in 2015 unchanged at 4.0 percent. The downward revision is mainly due to a weaker than expected GDP growth in the United States for the first quarter of 2014 as a result of extreme weather events, softening domestic demand in China, geopolitical instability between Russia and the Ukraine, and a less optimistic growth outlook for several emerging markets.

Global oil demand is projected to grow by 1.2 million barrels per day (mb/d) in 2014 and 1.4 mb/d in 2015 based on the average of forecasts by the International Energy Agency, the Energy Information Administration, and OPEC. Accelerating global oil demand growth coupled with very low tanker fleet growth, particularly in the crude sectors, is expected to drive an increase in tanker fleet utilization and spot tanker rates during the remainder of 2014 and 2015.

Teekay Tankers’ Fleet

Liquidity

As of June 30, 2014, the Company had total liquidity of $250 million (which consisted of $21.8 million of cash and $228.2 million in an undrawn revolving credit facility), compared to total liquidity of $149.4 million as at March 31, 2014.
Source: Teekay Tankers Ltd