The following is a summary of Teekay Tankers (TNK) November presentation. The information for this summary was taken from the video found here.
We said after the September update that we could see sub $2 levels before things get better. The stock hit a low of $1.84 at the beginning of November. I am surprised how quickly it recovered until we look at the November update. TNK expected rates to recover in Q4 above ten thousand dollars a day and if October is any indication the recovery is a little better than expected. In the November update they noted Suexmax rates averaged $20-25 thousand per day with Aframax rates in the mid-teens although this does not fit the charts they posted below although rates have improved dramatically.
Reasons for the increase:
Refiners are starting to ramp up (normal seasonality kicking in)
Recovery of Atlantic Basin production
Nigerian production improving, up to 1.9 billion barrels per day from 1.4 and expected to rise.
Libyan production increasing although volume is small.
First cargos starting to leave the Caspian Sea loaded from the Black Sea.
Reasons for possible short term improvements going forward:
Winter weather causing delays.
Expect more production from the Atlantic basin.
If OPEC cuts production could create longer hauls to Asia from Atlantic production ramping up.
Refiners increasing production.
No change in the 2017 outlook with the exception that a rebalancing of the oil market could occur earlier than thought along with potentially higher oil prices but this is speculation at this point. The view from September:
"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."
2018 recovery expected due to 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. Scrapping is also expected to pick-up. Markets expected to rebalance in 2017.
The recovery from sub $2 has been rapid but the 2017 outlook is still grim so the price could be volatile for the next few quarters if rates remain volatile. I calculate a fair value of about$3.60 and this based on very little bottom line growth over the next few years. I consider this a conservative view with more upside potential than downside. The minimum 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 and given the 2017 outlook.
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. The puts expire this Friday (11/18) and as of this writing the price has exceeded the strike price.
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