2023-08-06 07:17:27 ET
Summary
- Teekay Tankers' Q2 results were well received by investors, with the stock closing the trading day up 2.01%.
- The company's share price has increased by 93% in the last 52 weeks, driven by strong demand for oil tankers and improving financials.
- Teekay Tankers could generate up to 45% FCF yield.
- The oil tanker market outlook will continue to support high day rates for the next quarters.
A couple of days ago, Teekay Tankers (TNK) released its Q2 results with key figures that were well received by market investors: indeed, the stock close the trading day at +2.01% (August 3 rd , 2023) with a bit more than 1 M traded shares. In this article, I will provide an overview of Teekay Tankers’ Q2 results from a financial and operating point of view, and I will also explain why I believe Teekay Tankers is a BUY.
Stock performance
During the last 52 weeks, Teekay Tankers’ share increased by 93%, almost doubling its market capitalization which, as of August 3 rd , 2023, is $1.5 B ($44.08/share). The growth was affected by the strong demand for oil tankers that led to historically high tanker rates as well as Teekay Tankers’ improving financial situation. Even during 2023, the stock kept growing and is currently up 43% year-to-date. The 52-week maximum is $47.6/share (March 2 nd , 2023) while the 52-week minimum is $22.8/share (August 5 th , 2022).
Q2-2023 results
Q2 results are sound mostly due to strong revenue generation. Total revenues were $371 M, up 53% year-on-year, primarily due to higher tanker day rates: Suezmax rates were $56.7k/day in Q2-2023 vs $25.3k/day in Q2-2022 (+ 124%) and Aframax rates were $49.9k/day vs $25.5k/day (+96%). Revenues increased also due to a small increase in revenue days with total revenue days increasing by 7% year-on-year.
However, it is relevant to notice that, despite revenues were still high in Q2-2023, they showed a negative trend versus the previous quarter (Q1-2023): indeed, revenues dropped by 6% quarter-on-quarter, from $394 M to $371 M due to Aframax tanker rates being lower.
Indeed, if we compare Q2-2023 vs Q1-2023 tanker rates, one can see that Suezmax day rates were stable at around $55-56k/day while Aframax rates declined 24% from $65.5k/day in Q1-2023 to $49.9k/day in Q2-2023.
Total OpEx pre gain/write-down was $211 M in Q2-2023, in line with the $209 M of the previous year and the $211 M of the previous quarter. The largest item is obviously the voyage expense ($118 M) followed by vessel operating expenses ($38 M) and depreciation ($24 M).
Net income for Q2-2023 was $151 M, up 445% year-on-year but down 12% on a quarterly basis ($171 M in Q1-2023).
Moving to the cash flow statement, cash flow from operations for H1-2023 was positive at $370 M (vs $2 M of CFFO generated in H1-2022) mostly driven by the high net income for the first half of the year ($320 M).
Cash flow from financing activities was negative at -$377 M since Teekay Tankers significantly reduced its debt exposure: to give an idea, as of June 30 th , 2023, the net debt was $28 M, down from $181 M in Q1-2023 and $345 M in Q2-2022.
Cash flow from investing activities was almost nil at -$0.8M. At the end of Q2-2023, Teekay Tankers has a cash balance of $178 M.
With such a low debt exposure and high day rates, Teekay Tankers is a FCF generation machine: for every $5K in day rates above the FCF breakeven day rate of $16k/day, and additional $2.60 FCF per share is generated: in particular, based on the Q2-2023 annualized day rates, Teekay Tankers is expected to generate an FCF of about $19/share, equivalent to an FCF yield of 45%.
Market Overview
Spot rates for Suezmax and Aframax will continue to remain around high levels. So far, in Q3-2023, the Suezmax day rates averaged $42.8k/day while the Aframax averaged $48.3k/day: while these rates are lower than Q2-2023, they are still much higher than historical rates and will ensure a strong FCF generation even in the next quarters.
In my opinion, the market outlook for oil tankers will remain positive for at least the next 2 years. Indeed, according to the International Energy Agency (IEA), oil demand will reach a peak of 102 Mbbl/d in 2023 and in 2024 it will further increase by an additional 1.2 Mbbl/d. The growth in demand will be met by an increase in non-OPEX+ producing countries from the Atlantic Basin producers, implying longer distances to be covered by oil tankers.
In addition, the EU ban on Russian oil and oil products is now in full force and Russia is exporting 90% of its oil production to India and China via tankers, supporting a constant demand for oil tankers and long voyages. Therefore, on one side there is a strong demand for oil tankers but, on the other side, the oil tanker supply is not following on par. According to Clarksons, the shipyard capacity for 2024 and 2025 is fully booked and the worldwide tanker fleet is expected to grow by only 2% in 2023 and 0% in 2024/25.
As a consequence of strong demand and a low supply of oil tankers, day rates are expected to remain at high levels.
Risks
The main risk for Teekay Tankers is represented by its fleet age: on average, Teekay’s vessels are 14 years old. From my point of view, this is a two-sided risk. From one side, an old fleet implies potentially higher operating costs due to lower vessel efficiency, higher insurance premia and more maintenance needed. In addition, older vessels might not be compliant with CO2 emissions regulations with the results that some investments might need to be carried out to modernize the vessel.
On the other hand, an old fleet means that, sooner or later, Teekay Tankers will have to start replacing the oldest vessels with newly built ones but, as mentioned before, shipyards do not have the capacity and, ordering a tanker now, might even cost more than usual.
Conclusion
Overall, I believe that Teekay Tankers has come a long way in the last quarters with a strong FCF generation that led to a balance sheet de-leverage. Today, Teekay Tankers is a solid company. The market outlook is still positive, and I believe that Teekay Tankers’ share still has room for growth. In conclusion, I believe that Teekay Tankers is a stock worth buying.
For further details see:
Teekay Tankers: Up To 45% FCF Yield