Teekay Tankers December 2016 Summary And Comments

December 22, 2016

 

 

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

 

Rates have recovered in Q4 for both the Suexmax and Aframax as reflected below.

 

 

​Reasons for the increase (some mentioned in the November update):

  • Refiners are ramping up (normal seasonality kicking in)

  • Nigerian production improving.

  • Winter weather causing delays which ties up vessels.

  • Floating storage increasing in response to OPEC cuts, i.e., anticipating higher prices.

  • OPEC cut could create longer hauls to Asia helping offset vessels made available from the cut.

  • High oil production. 

 

While rates are expected to stay strong through the winter the 2017 outlook has not changes. 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... "

 

Bottom line; rates in Q2 and Q3 are expected to be weak so don't look for a recovery until 2018 at the earliest.  2018 recovery expected due to very few tanker orders, i.e., the 2018 delivery schedule for tankers is low. Scrapping is also expected to pick-up. Comments from the last conference call:

 

"While scrapping has been low over the last two years, we anticipate that this will accelerate in the coming years as more ships approach the 20 year mark and this new environmental regulations impact the economics of trading older vessels beyond their third and fourth special survey dates."

 

Conclusion

Not much has changed since the last update although the good news is rates are higher than I expected but they will not hold after the winter so the 2017 is going to be a difficult year as expected.

 

I've slightly modified the fair value to $3.30. I've added a new graph to the summary tab of the FV template showing operating income to debt ratio.  I consider this high risk and the debt is a head wind unto itself as it relates to operating income:

 

They do recognize the need to deleverage. In October, Teekay Tankers agreed to sell its last remaining MR product tanker and two 2002-built Suezmax tankers for total combined proceeds of $47 million, which along with the cash flow generated during the quarter is expected to further deleverage the balance sheet further.

 

Disclosure:

From the November blog: 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. The puts expire this Friday (11/18) and as of this writing the price has exceeded the strike price. 

Update: I was put the stock for an adjusted cost of $2.20 plus fees. I have no outstanding options at the time of this writing.

 

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

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