• David Klein

Teekay Tankers September 2016 Summary And Commentary


The following is a summary of Teekay Tankers (TNK) September presentation. The information for this summary was taken from the video found here.

Steep decline in crude tanker rates in Q3; rates not seen for a couple years.

August-September would be the weakest part of the year because refiners reduce their purchasing of crude when they go into maintenance. There are other factors for the steep declines this year.

Fleet growth for Aframax tankers and above has been accelerating this year; deliveries in 2015 averaged about 1 million dead weight per month, this year that's doubled to about 2 million. Impact of that high order book starting to be felt in tanker rates.

Oil production increased by two to three percent in 2014-2015, this year supplies been very flat. Production declines mainly in the Atlantic Basin, North America, Latin America but especially in West Africa and Nigeria. Nigeria, as much as 800,000 barrels a day offline this summer, equivalent to 20 fewer Suexmax cargos per month. The reduction in Atlantic oil production doesn't just have an impact on volumes it also has an impact on the distance one of the big drivers of crude rates and crude tanker demand over the past three or four years has been this excess supply. In June/July the amount of Atlantic crude going to India and China was about one-and-a-half million barrels a day lower than it was in the first quarter

of the year.

Lower demand from refiners in the last couple months. Some is seasonal because of maintenance but some of it is structural in that global inventories of both crude and refined products are at high levels so there's less incentive for the refiners to run the refineries at very high throughput levels having an impact on the demand side.

Some things that helped the tanker market earlier in the year such as congestion at ports in China and unloading in Basra (Iraq) has cleared and that's freed up tonnage to be on the spot market competing for cargo; a negative for the mid-size tanker market.

Looking towards Q4 and the Winter Market, expect rates to recover, moving above ten thousand dollars a day and come back with normal seasonality as you get higher demand in the winter months as refiners start to increase throughput again. December and January are typically the strongest months.

There could be some upside from production increasing in Nigeria.

2017 the tanker market certainly faces a lot of challenges not least of which is another year of very high fleet gross in 2017, about five-and-a-half and six percent next year that could be even higher in sub segments. A lot of ships the market must absorb next year at a time when the oil markets could be a period of rebalancing with oil prices remaining relatively low. Don't expect oil production will grow much in 2017.

The encouraging thing for 2018 is very few orders have been placed in the last six to 12 months so the 2018 delivery schedule for tankers is going to be low and if the all markets have gone through a period of rebalancing in 2017, 2018 might get to the point where all prices have recovered sufficiently that it will kick-start some production again.

Conclusion

I believe the market views the stock as dead money resulting in an oversold stock. I calculate a fair value of about$3.60 and this based on little to no bottom line growth over the next few years. The dividend of $0.03 should be maintained going forward. If rates do normalize in 2018 the gains could be substantial not to mention a higher dividend payout although that time horizon is probably too long for many investors to take an interest since we could see sub $2 levels before things get better. There is no rush to buy the stock but could offer a substantial return should rates recover in 2018 … if they recover.

Disclosure: I am long the stock and could be longer since I am the writer of November 2.5 puts sold for $0.30 back in June. We'll see what is new in their October update but I don't expect any major changes in the short term.

Feel free to send comments about TNK or any feedback to iiex@live.com

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