Summary
- TNK has one of the largest fleet of tankers operating in the spot market.
- Tanker rates have been elevated due to Russian oil disruptions.
- As the full impact of Russian oil sanctions are felt in the coming months, expect tanker rates to stay elevated.
- The fly in the ointment is a potential recession in 2023, which could prompt more production cuts from OPEC+, which can hurt tanker rates.
A few months ago, I wrote a bullish article on Teekay Tankers Ltd. ( TNK ), arguing that high tanker rates could be sustainable due to Russian disruption to shipping routes. Since my article, shares of TNK have rallied over 60%, far outperforming the S&P 500 which has been mired in a deep bear market.
TNK's recent quarterly results suggest my bull thesis continues to play out as Russian crude oil is redirected to faraway countries like India and China. Europe is also replacing Russian crude with oil from the Atlantic basin, increasing tanker utilization and rates. TNK continues to be one of the best positioned, with 98% of its fleet is operating in the spot market. However, investors need to be mindful of a slowing global economy, which may prompt further production cuts from OPEC+ that can hurt the seaborne oil trade.
Brief Company Overview
Teekay Tankers Ltd. operates a fleet of 51 crude oil and product tankers, including 25 Suezmax, 9 Aframax, 1 VLCC, and 9 LR2 product tankers operating in the spot market (Figure 1).
Figure 1 - TNK fleet as of November 2022 (TNK Q3/2022 Press Release)
Revisiting Bullish Thesis
A quick refresher for those not familiar with the bullish crude tanker thesis. My bullish thesis on crude oil tankers and TNK in particular is that spot tanker rates will remain 'higher for longer' due to EU sanctions on Russian crude oil imports and the redirection of Russian oil exports to the Far East.
Historically, Russian crude oil and oil products export were sent to nearby ports like the Port of Rotterdam in the Netherlands. However, as the EU banned the import of Russian oil, European refineries have to replace nearby Russian crude with long haul crude from the Middle East and the Atlantic basin. Furthermore, sanctioned Russian crude have to be transported to faraway countries like India and China to find a home.
Essentially, we are replacing short-haul 5-day voyages between St. Petersburg and Rotterdam with long-haul voyages between St. Petersburg and China or Houston to Rotterdam. TNK has an excellent slide detailing the shift in seaborne oil flows, reproduced below as Figure 2.
Figure 2 - Seaborne oil flows due to Russia sanctions (TNK Q3/2022 Presentation)
This change in oil flows have led to elevated tanker spot rates, as tankers are placed into long-haul voyages. Figure 3, 4, and 5 shows Suezmax, Aframax, and LR2 tanker spot rates respectively.
Full Effect Of Sanctions Still To Be Felt
According to TNK's management, although we have begun to see the shift of Russian crude oil flows as described above, the EU continues to import significant amounts of Russian crude oil (1.5 million b/d) and refined products (0.8 million b/d) in September. These flows are slated to cease in December and February respectively, when the full sanctions come into effect. Hence, the tanker market is expected to get even tighter in the coming months.
Latest Quarter Suggests Strong End To Fiscal Year
In the third quarter that was just released on November 3rd, 2022, TNK reported revenue of $279 million (+141% YoY) and adj. EPS of $1.70, both well ahead of Wall Street estimates.
Importantly, while Q3/2022 spot rates were strong at $33,200 / d for Suezmax and $35,900 / d for Aframax tankers, Q4-to-date rates were even higher, with TNK reporting $40,000 /d for the Suezmax fleet, $36,600 / d for the Aframax fleet, and $44,700 for the LR2 fleet (Figure 6). This bodes well for the upcoming Q4 report and potentially into 2023.
TNK Is Printing Money At Current Rates
The beauty of the crude tanker business is that operating costs are relatively fixed, so when we get a period of high tanker rates, the business is able to generate tremendous amounts of free cash flow. TNK's fleet-wide cash flow breakeven is tanker rates of ~$15,000 / d. Above this level, every $5,000 in tanker rates will translate into $85 million or $2.50 / share in FCF.
Based on current tanker rates, TNK estimates it can generate $12.50/ share in FCF over the next 12 months (Figure 7).
Figure 7 - TNK can generate $10-12 in FCF at current rates (TNK Q3/2022 Presentation)
At $34 / share, TNK is trading at an elevated FCF yield of over 30%. If high tanker rates persist in the coming quarters, investors can expect the company to be essentially debt free by the end of 2023.
When TNK was first formed in the 2000s, the company paid a substantial dividend of $2.79 in 2008 and $1.86 in 2009. As TNK regains balance sheet strength, we may see the company reinstate some form of capital return to shareholders.
Storm Clouds On The Horizon
While I remain bullish on TNK based on the potential for higher tanker spot rates heading into 2023, investors need to be mindful that economic storm clouds are gathering on the horizon. Recently in October, in response to weakening global growth and crude oil prices, OPEC+ announced 2 million b/d in production cuts . While the actual cuts are closer to 1 million b/d as many OPEC+ countries were not producing at their quotas, the production cut does symbolize potential risks to seaborne oil flows. In particular, with U.S. recession probability recently hitting 100% , there is downside risks to global oil consumption.
On the positive side, recent developments out of China suggest a potential easing of the draconian zero-COVID policies that have hampered Chinese oil demand so far in 2022, with the IEA forecasting the first YoY decline in Chinese oil since the 1990s. As the largest oil consumer in the world, any changes to Chinese oil consumption will have far-reaching impact on the seaborne oil trade.
Conclusion
In conclusion, I continue to believe tanker spot rates will stay higher for longer, as Russian crude oil is redirected to faraway countries like India and China. Europe will have to replace Russian crude with oil from the Atlantic basin, which will increase tanker utilization, leading to higher tanker rates. TNK stands to benefit the most, as 98% of its fleet is operating in the spot market. However, investors need to be mindful of a slowing global economy, which may prompt further production cuts from OPEC+ and hurt the seaborne oil trade.
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Teekay Tankers: Tanker Rates Stay High