What Floats Teekay's Boat?
Board: Value Hounds
Teekay Tankers (TNK), the youngest of the Teekay Corporation's (TK) publicly listed subsidiaries reported their Q4 2013 results today. Through the end of 2013, TNK was also the smallest of the Teekay subsidiaries. But there are a couple of events in 2014 that will significantly change the order of the Teekay entity fleet sizes. At least, that will be true if one considers the size of fleet that TNK will manage.
I mentioned the two events in a prior post, but here they are again. 1. Teekay creating, and co-investing with TNK, in a subsidiary, Tankers Investment Limited (TIL) that will acquire, operate and sell second hand tanker vessels. TK and TNK have each contributed $25M, that represents 20% of TIL, and have acquired vessels for the initial fleet. 2. Teekay will transfer technical and commercial management of three tanker pools (Gemini and Taurus pools) and the Aframax Revenue Sharing Agreement (RSA)/pool over to TNK. Collectively, this structure is referred to as "Teekay Operations", and include vessels from third parties. #1 has the potential to grow the TK/TNK fleet in the future. But #2 is what impacts TNK's fleet size in the near term. Besides TNK's spot trading vessels, the three pools manage vessels for other parties including Diamond S Shipping, Koenig Shipping, etc. All told, over 80 vessels in total, and likely to grow as the TIL fleet grows.
But now let me rewind back a little. TNK started out as a Teekay subsidiary in 2007 with a very simple business model- operating mid-size (Suezmax and Aframax) tankers. Over the years, TNK has added vessels to its fleet, but also added additional business lines. These include 1. From time-to-time, having a couple of charter-in vessels to assist on the revenue side without incurring a big capex spending outlay. 2. Financing a pair of ship mortgages- a three-year deal that was supposed to expire in mid-2013, but ran into some issues. 3. A joint-venture project where TNK have a 50% stake in the acquisition and chartering of a VLCC. The joint venture partners secured a 5-year charter for the vessel which delivered in mid 2013.
Let me break down the fleet before I jump into revenue. 11 Aframax vessels 10 Suezmax vessels 1 50%-owned JV VLCC 3 Long Range (LR2) vessels- similar size as an Aframax, but carries refined fuels 3 Medium Range (MR2) vessels - also product vessels, carry about half the capacity of an LR2 1 charter-in Aframax vessel The owned vessels range in age from 3 1999-built Aframax vessels to a 2009-built Suezmax. So, 14.5 - 4.5 year old vessels. The JV 50%-owned VLCC in 2013.
On the revenue side, the owned fleet probably generates $150M - $200M in revenue. Assume 10-20% margins, that's $15M - $40M. A charter-in vessel earns the delta between avg. vessel charter and charter-in rate. Just to get a feel for the type of numbers, say avg vessel charter was $15K daily and charter-in rate was $13K, that's $2K daily, or about $730K. Tinker with it, $3K daily = slightly over $1M. At least the way TNK has its charter-in strategy it is usually a 6 months + 6-month option, or 1-year + 1 or more 1-year options. That gives me the sense that there is a slight hedging strategy in this exercise. The ship mortgages were a cash flow figure calculated from an interest rate spread. IIRC, it was supposed to be about $10M - $11M a year. Lastly, the JV just shows as a line item on the income statement - about $800K/quarter for TNK.
The first 2.25 years, TNK got paid on time on the ship mortgage transaction. Then the owner of the two VLCCs ran into problems, and stopped paying TNK. When one looks at the type of revenue/cash flow earned by the different types of vessels as detailed in the previous paragraph, the hit from not getting paid in a timely manner would have an impact on TNK's bottom line. Events took a turn for the worse when the owner ran into more problems, and one vessel got detained in Egypt early in 2013. TK/TNK took over complete management of both vessels, and still fill that role today (about six months after the original contract was supposed to expire). For most of 2013, TK/TNK had to deal with the uncertainty of whether they would get paid, and when. Taking over vessel management is now offering a silver lining. VLCC charter rates have improved, and that has helped lift VLCC vessel values. If the lien-holders want the vessels back, TK/TNK demand back payments first. Both vessels are operating in the spot market, and easily earning more than they were earning last year. Again, a positive for TNK, unless the contract specifically states the lien-holders get paid first.
So how much does "Teekay Operations" bring to the table? Aaaiii! All these years I've tossed Teekay into the "too difficult" pile. One reason for this was the tangled mess, some of which is now "Teekay Operations". I found it would require a fair amount of patience to sift through Teekay (TK) parent reports, and try to map the "charter-back" revenues i.e. revenue that the subsidiaries earned because TK had to cover charters. And mixed in with that is the stuff that is now Teekay Operations i.e. the revenue from the tanker pools. And just to complicate a teensy bit more, revenue from four newer owned Suezmax vessels. The last four vessels are four of the first eight vessels of the Tankers International Limited (TIL) fleet. From what I can tell the jumble mess amounted to less than $100M annually.
I went looking for last year's post on TNK, and here were my final thoughts in that post Although I have a value as high as $3.80/sh for TNK, it really expects many things to go right. I'm not really sure I see that at this time. Does parent company, TK, have any plans for TNK? They hold a stake in TNK. Will they be proactive in boosting their investment? Just thing aloud, buying shares of a subsidiary with a higher yield than TK's yield, could pay off in more than one way.
TNK's one year chart-- http://finance.yahoo.com/q/bc?s=TNK+Basic+Chart
Other than brief blips in December and January, TNK's shares have traded below $3.80/sh for much of the last 12 months. Note that TNK hit its 52-week high the day TK/TNK announced the creation of TIL and the transfer of Teekay Operations to TNK. So TK did boost its investment in TNK ... just that it was in a different way than I envisioned :) What was also missing from their earnings presentation was the status of the TNK LR2 newbuilds. Since the company had not put any deposit money down, I think TNK management likely abandoned the newbuild strategy. More than likely, creating the TIL entity was the back-up plan.
Nice TNK bounce today- up over 12% on 2/20 No TNK position,