2024-01-10 07:44:32 ET
Summary
- Teekay Tankers has 53 vessels at an average age of 14.7 years. 96% of the fleet operates under spot charters.
- TNK has top balance sheet with a 0.9 cash-to-total debt ratio and 16.7% total debt-to-equity.
- The company scores the highest returns due to its revenue structure, although its margins are not as impressive.
- TNK stock trades at 0.88 P/NAV and below its past multiples, providing a margin of safety. My verdict is a buy rating.
Introduction
Teekay Tankers ( TNK ) is one of the big players in the crude oil tanker market. The company has 53 vessels primarily contracted under spot charters. Its fleet average age is 14 years, and none of the ships are scrubber-equipped. On the other hand, financially, TNK is faring better than its major competitors Frontline ( FRO ), DHT Holdings ( DHT ), Euronav ( EURN ), and International Seaways ( INSW ). TNK has better liquidity, maintains lower leverage, and achieves superior returns. The company is lagging with its dividend policy. It distributed dividends with a modest yield of 1.78% ((TTM)). TNK is the cheapest in its peer group and trades at the lowest P/NAV multiple.
The drawbacks are the older fleet, lack of scrubbers, and poor dividends. However, I like higher exposure to the spot market at the current stage of the shipping cycle. With the looming crisis in the Red Sea, Aframax and Suezmax rates will surpass VLCCs, and TNK might turn into a printing press. TNK trades at 0.88 P/NAV and below its past multiples, providing a margin of safety. My verdict is a buy rating.
Crude oil tankers market overview
My journey as an author for Seeking Alpha started with an article about FRO . One of the points I argued about is the growing tanker deficit. Both sides of the equation, demand and supply, are pushed to the extremes, resulting in a widening deficit. The supply side is a function of the average age of the global tanker fleet, the order book as a percentage of the worldwide fleet, and shipyard capacity.
The chart below from the last corporate presentation explains those dynamics.
The crude tanker order book is at 6%, while the shipyard capacities have declined since their peak in 2008. 11% of the global fleet is approaching replacement age, which is 20 years. Another 14% of the fleet will fall into that age bracket in the coming years. The rate of the expected tanker fleet growth is steadily declining.
The demand for others is not going to decline.
Despite the voluntary cuts, Saudi Arabia has increased its exports QoQ. Russian oil exports rose, too, by 0.4 mb/d. The lifted sanctions on Venezuela additionally boost the demand. The refineries reduced their idled output at a global scale, pushing further the demand for crude oil. Moreover, the unprecedented disruption in the Red Sea acts as an amplifier.
Even without the Middle Crisis, the fundamentals would gradually increase the day rates. But now we have the Houthis waging asymmetric warfare. With their scarce resources, they achieve outsized “returns” by obstructing one of the global choke points. The big winners will be Aframax and Suezmax vessels designed to sail through the Red Sea.
The smaller tankers and the VLCCs follow different routes. Nevertheless, they will be impacted, too. The global marine transport network is a complex system, and once you suffocate one of its choke points, there will be long-term consequences. The first-degree effects are already visible in the container shipping segment; the ZIM Integrated Shipping ( ZIM ) stock chart has much to tell. The second-degree effect is the Suezmax and Aframax tanker market. TNK has the ingredients to bet on extended Red Sea disruption and growing crude tankers deficit.
TNK fleet
TNK is one of the leading companies in the crude oil tanker segment. The company operates 55 vessels. The table below from the 3Q23 report shows TNK's present fleet.
TNK owns 45 of the ships. The rest are chartered. The company runs a “concentrated” portfolio of 26 Suezmax, 26 Aframax tankers, and 1 VLCC. One red flag is the age of the vessels. It is higher than its main competitors, as seen on the chart below from the FRO presentation :
TNK fleet does not have scrubber-equipped vessels. All vessels run on VLSHFO. The scrubber-run ships command higher day rates, making scrubber installations economically viable decisions. When I pick shipping stock, I prefer at least some ships to have installed scrubbers. TNK is a rare exception.
The company has the perfect fleet for the current cycle and the Red Sea crisis. To fully benefit from that, TNK needs maximal fleet utilization. Installing scrubbers adds extra complexity to an already complex system. This means more downtime for maintenance, adversely affecting fleet utilization.
96% of them are contracted under spot charters. It is a risky endeavor with an asymmetric payoff if the company plays the cycle well. The table below from the 3Q23 report shows day rates QoQ and YoY.
Suezmax day rates declined QoQ by 37%, while Aframax dropped by 26%. However, from a distance YoY, the rates increased: Suezmax by 6.2% and Aframax by 3.4%.
TNK financials
In the introduction, I said TNK has the best balance sheet. Now it's time to see why. The table below shows TNK's solvency and liquidity over the years.
In 2019 and 2020, the company had 117% total debt to equity and 1.9 EBITDA/Interest expenses. Since then, TNK has considerably reduced the leverage, achieving conservative figures for tanker owners, 16.3% total debt to equity, and 21.5 EBITDA/Interest expenses.
TNK has $227 million cash and $231 million total debt (including lease obligations), resulting in a 0.9 cash-to-total debt ratio. This number exceeds its competitors' wide margins cash to total debt ratio. FRO scores 0.02, DHT 0.17, EURN 0.09, and INSW 0.25.
Company interest expenses in 3Q23 were $5.9 million; in 3Q22, they were $9.0 million, or a 30% decline in interest expenses YoY. TNK realized $628 million in free cash flow (LTM) and $638 million in operating cash flow (LTM). The company is flushed with liquidity.
The following chart shows the debt repayment schedule:
In the coming years, TNK must repay $21 million per annum. Given the company's liquidity position and capital structure, those payments will not be an issue.
TNK profitability
Let`s first compare how TNK scores against its main competitors:
- TNK 51% Gross Margin, 46% EBITDA Margin, 47% ROE, and 23% ROTC
- FRO 57% Gross Margin, 54% EBITDA Margin, 36% ROE, and 12% ROTC
- DHT 59% Gross Margin, 55% EBITDA Margin, 18% ROE, and 10% ROTC
- EURN 71% Gross Margin, 67% EBITDA Margin, 34% ROE, and 11% ROTC
- INSW 73% Gross Margin, 67% EBITDA Margin, 43% ROE, and 17% ROTC
Compared to FRO, DHT, EURN, and INSW, TNK has superior returns. However, the company`s profit margins are on the other spectrum, the lowest in the peer group. The reason for the higher returns but lower margins resides in TNK's revenue streams and its fleet specifics.
TNK revenue comes from spot contracts. While the day rates are growing, making spot contracts takes advantage of the cycle. The tradeoff is the risk of catching the end of the cycle, resulting in steep losses. I assume we are in the middle of the current cycle. If the market proves me correct, TNK will keep earning impressive returns.
Companies like FRO and EURN with VLCCs benefit from economies of scale. If we increase the size of a vessel by 100%, its fuel consumption and price will grow 50-75%. The bigger the ship, the cheaper the cost per cargo ton. The result is wider profit margins.
The chart below compares the companies based on ROTC and total debt to total capital. The goal is to assess the company`s management's ability to allocate capital.
TNK has 22.9% ROTC and 14% total debt to total capital. TNK is the only one in the sample group where the return on capital exceeds the higher debt-to-capital ratio. Kind reminder: one exceptional metric is not enough to make a well-argued investment decision. The same rule applies here. The catch here is the high average age of TNK`s fleet.
The table below analyzes the same groups of companies but from different angles: EV/EBITDA vs dividend yield. Both metrics are NTM.
FRO and EURN won that round. TNK takes the last position with a 4.63% dividend yield and 4.6 EV/EBITDA.
In 1Q23, the company announced its $100 million shares buyback program . I hope with a growing day rate, TNK will enhance its buyback program. I like dividends a lot. However, the buybacks have their distinct advantages. They generate shareholder value by reducing the number of outstanding shares. Besides that, knowing that the company buys its shares adds credibility to its top brass. Last but not least, the dividends are subject to taxes; however, unrealized gains are not. Simply put, buyback programs create nontaxable shareholder value (till the shareholders cash in).
TNK Valuation
To estimate the value of TNK, I use P/NAV and relative valuation. Let’s calculate the first company`s net asset value. To figure out TNK`s vessels' value, I picked data from the last Fearnleys report . The quoted prices are for five- and ten-year-old vessels. Given TNK`s fleet's older age, I use 5% annual depreciation to estimate the price of 15-year-old ships.
The inputs for the NAV equation are as follows:
- Suezmax 15 years old, $47 million
- Aframax 15 years old, $43 million
- Current Assets: $464 million
- Total Liabilities: $348 million
- TNK share price $56.2
TNK NAV = $ 2,167 million
P/NAV = 88%
TNK, at the present price, still provides some margin of safety.
The graph below shows TNK`s EV/Sales, EV/EBITDA, and P/TBV over the last ten years.
The company is undervalued compared to its peak multiples and average values.
However, compared to the other major tanker companies, TNK is reasonably priced.
- TNK trades at 1.35 EV/Sales, 4.37 EV/EBITDA, and 1.44 Price/Book
- FRO trades at 2.85 EV/Sales, 4.36 EV/EBITDA, and 1.18 Price/Book
- DHT trades at 2.85 EV/Sales, 4.36 EV/EBITDA, and 1.18 Price/Book
- EURN trades at 2.03 EV/Sales, 3.7 EV/EBITDA, and 1.48 Price/Book
- INSW trades at 1.58 EV/Sales, 3.67 EV/EBITDA, and 1.14 P/TBV
TNK offers upside potential considering P/NAV and its multiples. All of the companies above trade at similar P/TBV. The difference comes in their EV multiples. As stated, fleet peculiarities and revenue streams determine companies' returns and margins.
Risks
The liquidity risk is almost nonexistent for TNK. On the other hand, the most pronounced risk is the shipping risk. In other words, the balance between demand and supply. The fundamentals are aligned for a deficit, although that suddenly can change if OPEC drastically cuts oil production. Another adverse scenario is to have a deep recession. Both mentioned scenarios mean declining crude oil demand. That means a steep decline in the day rates. Having 96% of its fleet under spot charter contracts will severely shrink the company`s profits. The aging fleet is another risk idiosyncratic to TNK. Older ships mean more frequent maintenance and unscheduled repairs, resulting in a more extended downtime. TNK has a reliable defense line against those risks thanks to its large cash position.
The market risk is always present. The tankers and shipping, in general, have a low correlation to the broad equity indexes. Unless we have a massive sell-off like in March 2020, I do not expect a declining stock market to impact tanker stocks negatively.
Investor takeaway
TNK is a company of dualities. Though it has the best balance sheet, it is the oldest fleet in its peer group. It scores the highest returns, though it generates the lowest margins. TNK operated 96% of its fleet under spot charters, getting direct exposure to the spot fluctuations. I believe we are in the middle of the cycle, and being exposed to market changes is the way to reap maximum profits. Every opportunity comes with its drawbacks. TNK is no exception.
If my thesis is wrong and the day rates tank, TNK revenues will suffer profoundly. The company pays dividends with adequate yields and, in 1Q23, announced its $100 million share buyback program. The company trades below its NAV and its past multiples at the current price. I would happily give a strong buy at P/NAV lower than 50%. The current price still provides a good entry point for adventurous investors seeking to benefit from the Red Sea crisis and the ongoing shipping cycle.
For further details see:
Teekay Tankers: Bet On Crude Oil Tankers With The Best Balance Sheet And The Oldest Fleet