Teekay Tankers (TNK, Financial), which is engaged in the marine transportation of crude oil and refined petroleum products through the operation of its oil and product tankers, has surged higher by 32% in the last one year. The stock has, however, declined from 2015 highs of $8.4 on Oct. 20, 2015, to current levels of $6.9.
The company’s business model and strategy will make it clear for investors why Teekay Tankers is likely to see another strong year. The key point is that the company’s oil tanker business is significantly impacted by oil price trend. As oil prices remain lower, the demand for oil tankers is robust and spot rates are high. The reason is storage of strategic reserves when crude prices are lower. Therefore, as long as oil prices remain sideways or lower, tanker spot rates will remain robust. In line with this view, the company’s tanker rates will remain robust through 2016.
Coming to the spot rates trend, Suezmax spot TCE revenue per day for 3Q15 was $34,782 as compared to $21,134 in 3Q14. Further, Aframax spot TCE revenue per day for 3Q15 was $32,269 as compared to $22,105 in 3Q14. Clearly, spot rates have increased on a year-on-year basis and the following comment by the management is encouraging for 2016.
"We expect crude spot tanker rates to increase further for the remainder of 2015 and into the first quarter of 2016, mainly due to higher expected oil demand related to colder weather in the Northern Hemisphere, the continued building of strategic and commercial petroleum reserves in China and India.”
Besides the spot rate factor, the company's aggressive vessel acquisition is another reason to believe that revenue and EBITDA growth will be strong in 2016. In turn, the company’s stock is likely to trend higher. To put things into perspective, Teekay Tankers agreed to acquire 12 Suezmax tankers from Principal Maritime on Aug. 5, 2015. With all these 12 tankers likely to be in the spot market through 2016, the company's revenue growth can be expected to be vigorous.
In another positive development, Teekay Tankers announced a new $900 million debt facility scheduled to mature in 2021. This new facility will be used to refinance 36 of the company’s existing vessels, including the above-mentioned vessels. This helps Teekay Tankers extend the debt maturity profile in addition to highlighting the banker’s confidence on the company’s long-term business outlook.
In addition to stock upside that is expected in 2016, Teekay Tankers also revised its dividend policy in December 2015, and this has resulted in 4Q15 dividend of 12 cents per share from prior dividend of 3 cents per share. As a minimum, 48 cents annual dividend can be expected to continue through 2016, and dividends can increase if spot rates remain robust through 2016. This is yet another strong reason to consider exposure to Teekay Tankers.
From a balance sheet perspective, the company’s net debt to capitalization has declined from 65% in 3Q14 to 53% in 3Q15. With strong operating cash flows, the company’s balance sheet is likely to improve through 2016. The reason to highlight the balance sheet and strong cash flows is the fact that the company has pursued acquisition growth in the recent past. Considering current financial flexibility and healthy spot rates, it would not be surprising if Teekay Tankers acquires more vessels in 2016. This will provide additional revenue and EBITDA growth.
2016 will be another good year for Teekay Tankers, and the recent correction in the stock can be used to accumulate with a time horizon of 12 months. Results in 4Q15 ought to be strong, and that is likely to trigger renewed upside in the stock.
Disclosure: No positions in the stock
