Description

Teekay Tankers (TNK)

Teekay Tankers (TNK) represents a good value in a market that one might argue is not offering many value opportunities.  Teekay Tankers currently owns a fleet of 43 double-hull tankers, including 22 Suezmax tankers, 12 Aframax tankers, 7 Long Range 2 (LR2) product tankers and 2 Medium-Range (MR) product tankers, and has 13 time charter-in tankers.   The average vessel is approximately 8 years old.  Teekay Tankers' vessels are employed through a mix of short- or medium-term fixed-rate time charter contracts and spot tanker market trading. The Company also owns a Very Large Crude Carrier (VLCC) through a 50 percent-owned joint venture.   In addition, Teekay Tankers owns a ship-to-ship transfer business and a minority interest of approximately 10 percent in Tanker Investments Ltd. (TIL.OL), which currently owns a fleet of 20 modern tankers. 

Valuation

TNK trades at $4.00.  Book value is $5.68, with NAV is in the range of $6.50 using current vessel values according to vesselsvalue.com and adding additional company assets.  Enterprise value equals $1.7 billion consists of net debt of $1,075 and equity of $615 million.  2016 EBITDA is projected to be $333 million (multiple of 5.1), earnings of $1.46 (multiple of 2.7) and free cash flow per share of $2.25 (multiple of 1.8) free cash flow defined as net income plus depreciation and other non cash items. 

The values compare favorably with public comparables.  For example Nordic American Tankers which has a fleet of approximately 26 vessels with an average age of 13 years trades as follows: NAT stock price of $15.00.  Book value is $9.86, with NAV in the range of $10.00.  EV of $1.65 billion consists of $300 million of net debt and equity of $1,354 million.   2016 EBITDA is projected to be $211 million (multiple of 7.8) earnings of $1.17 (multiple of 11.8) and free cash flow per share of $1.05 (multiple of 14.2) free cash flow defined as net income plus depreciation and other non cash items.   

TNK is more levered but asset quality is higher.  Additionally, I describe below that the company recently took near term debt risk of the table by refinancing debt with longer maturity. 

New Dividend Policy

Part of the reason for TNK’s absolute and relative low valuation (compared to competitors such as NAT may be due to due other Teekay entities slashing dividends late in 2015 and the dramatic drop in share prices of Teekay (TK), Teekay LNG (TGP) and Teekay Offshore (TOO).  I wrote about TOO in December 2015 after the share drop from $30 to $5.  However, unlike other TK entities TNK effectively raised its dividend in the first quarter of 2016 and beyond with a new policy. 

TNK announced a new dividend policy to pay out between 30% and 50% of adjusted net income with an initial payout of $0.12 per quarter ($0.48 cents annualized).  The payment represents a 400% increase compared to the prior dividend rate and an annual dividend rate of 13% based on the current stock price.   With no newbuilds on order, TNK should be able to continue to pay down debt as well as pay dividends over the next few years.  Based on 2016 projections, the initial dividend represents a payout ratio in range of 30%.  NAT is trading with a dividend yield of 11.5% with a current payout ratio of 75%. 

Here is what Greg Makay CEO had say regarding the policy:  “Our new dividend policy will provide long-term investors the opportunity to more directly participate in the Company's strong free cash flow generation while enabling further de-levering of our balance sheet, which increases the Company's net asset value and further strengthens our financial position," "We believe the new dividend policy provides the right balance between prudently managing the balance sheet and distributing cash to shareholders. Given our desire to further de-lever our balance sheet over the near-term, the dividend declared for fourth quarter of 2015 is based on the lower end of the intended payout ratio of 30 to 50 percent of adjusted net income. Going forward, the payout ratio will be determined taking into account several factors, including the Company's financial leverage and potential growth opportunities, amongst others."

Debt Refinacing

Teekay Tankers also announced in December that it has secured a new $900 million long-term debt facility maturing in 2021. The new facility will be used to refinance 36 of the Company's existing vessels and the Company's main corporate revolving credit facility that matures in 2017. The new facility includes both a term loan and a revolving credit facility component, which will stretch out the Company's debt maturity profile as well as provide financial flexibility.   

Suesmax and Aframax Tanker Market.

The tanker market in 2015 was the strongest since 2008. The main catalyst for the market strength was continued high levels of global oil production, including an extra 1.0 million barrels per day (mb/d) of crude oil supply from OPEC. Global oil demand was also robust in 2015, growing by 1.7 mb/d, the highest level of growth since the post-financial crisis rebound in 2010. Oil prices fell in 2015 to the lowest average price in 11 years, which was positive for the tanker market as it led to higher refinery throughput to take advantage of strong refining margins, increased commercial and strategic stockpiling of oil, and lower bunker fuel costs for ship owners. Finally, tanker fleet growth remained low with just 2 percent growth in the crude tanker fleet during 2015.

The fourth quarter of 2015 was particularly strong, led by the large crude tanker sectors. This strength was driven by firm underlying fundamentals coupled with seasonal and one-off factors. The fourth quarter saw the onset of winter weather delays, including an increase in transit time through the Turkish Straits and fog in the US Gulf. Ullage-related delays resulted in increased waiting times at discharge ports due to logistical constraints, which further added to rate volatility during the fourth quarter.

Looking ahead, TNK anticipates that many of the positive fundamentals which existed in 2015 will continue during 2016. Global oil demand is forecast to grow by 1.3 mb/d in 2016 (based on the average of IEA, EIA, and OPEC forecasts). While this is a decrease from 2015 oil demand growth of 1.7 mb/d, it is above the average growth rate of 1.0 mb/d over the last decade. Global oil production is anticipated to remain high with no change to OPEC policy expected in 2016. In addition, the return of Iranian production is projected to add up to 0.5 mb/d of supply in 2016, further increasing global crude oil exports and keeping oil prices relatively low. Finally, while tanker fleet growth is set to increase in 2016, the tanker fleet growth is relatively modest for the mid-size sectors with anticipated tanker fleet growth of 4.5 percent and 4.0 percent in the Suezmax and Aframax/LR2 fleets, respectively, which compares favorably to the average fleet growth in the last decade of approximately 5.0 percent per annum. Furthermore, the fleet growth is weighted towards the second half of the year and thus, the full impact should be felt more in 2017 than in 2016.

In addition to positive supply and demand fundamentals, changing trade patterns are expected to benefit the mid-size tanker sectors in 2016. Although it is not expected to immediately translate into an influx of U.S. crude oil into global markets, the relaxation of the U.S. crude oil export ban is already resulting in an increase in European and West African imports to the U.S. Atlantic coast. The spread between the West Texas Intermediate (WTI) and Brent oil price has narrowed enough to make seaborne transportation of oil to the U.S. more economical than rail or truck transportation within the U.S. from domestic producers. Mid-sized tanker markets could also benefit from the expansion of the Panama Canal, which is scheduled to be completed in June 2016, as it will facilitate trade movements between the Atlantic and the Pacific, including crude and condensate exports from the U.S. Gulf to Asian markets.

Overall, TNK expects that 2016 will be a strong year for crude tanker fundamentals driven by high levels of global oil supply, rising oil demand, low oil prices, changing trade routes, and a manageable level of fleet growth.

As of December 31, 2015, the world Aframax and Suezmax crude tanker fleet consisted of 1058 vessels, with an additional 191 Aframax crude oil tanker newbuildings on order for delivery through 2019.   Currently, delivery of a vessel typically occurs within two to three years after ordering.   Some softening in tanker market is expected in 2017 as fleet growth expands to 6.5%.  However scrapping is also expected to increase from 1% to 2%.  Scrapping should continue to increase over the medium term as 20% of the current world fleet is older than 15 years. 

Investment Case

TNK should continue to build book value and NAV over the next three years even if the tanker market weakens some.  Making this assumption, over the next three years earnings should add at least $3.00 to book value with say $1.00 of that being paid out in dividends.  If we subtract dividends from $4.00 current share price we are left with a net exposure of $3.00 on something with a future book value of $7.50, nearly 2X the current share price. 

Oil shipping is a very cyclical business.   As a general value rule, companies have traded in the range of 50% of book value to 150% book value.  Odds of making money here with the stock trading at 70% of book seem to be good.  In a couple years the price today will equate to 50% of book.  To me, this is not a stock to put away for 10 years but one to “rent” when it’s below book and sell when it’s above book.  A nice dividend along the way helps alleviate boredom in the interim.

Catalyst

Continued good results and earnings in 2016

More awareness of the new dividend payout.  .48 cents on $3.96 cent stock.