“Teekay Tankers Ltd. (TNK) operates a fleet of 15 crude oil tanker ships, including nine Aframax class ships with a capacity of 750,000 barrels and six Suezmax ships with a capacity close to one million barrels. Like all tanker operators, Teekay leases its ships out to major oil companies for a fee known as a day-rate. In addition to the company’s existing fleet, Teekay has also formed a 50/50 joint venture with Wah Kwong Shipping of Hong Kong to build a new very large crude carrier (VLCC) ship that will be delivered in 2013 and will immediately begin a five-year time charter arrangement.
“VLCCs are the largest class of tanker and typically earn the highest day-rates of any class of ship. Finally, last year Teekay purchased two mortgages secured by newly constructed VLCC ships. These mortgages offer a roughly 10% fixed rate of return for Teekay over a period of three years, a stable source of cash flow that allows Teekay to pay out roughly an additional $0.20 in dividends per year. ...
“Teekay has a mixture of spot and time charter contracts covering its fleet. In the first quarter of 2011, 62% of Teekay’s ships are covered by time charters. In 2012, time charter coverage drops to about 30% with contracts covering a number of vessels set to expire. Spot charter rates are highly volatile but depend on two main factors: the growth in global oil demand and the supply of available ships. Growing global oil demand spells more demand for tanker shipments from major producing regions such as the Middle East and West Africa and tends to push up tanker rates. Similarly, a rising supply of ships means more competition between tankers and falling day-rates.
“Spot tanker rates have been depressed over the past year. Demand has not been the main problem: in 2010, global oil demand jumped by 2.9 million barrels per day, one of the fastest growth rates in the past three decades. And in 2011 demand is expected to jump by a healthy 1.5 million barrels per day to yet another record high. Oil demand has been driving strong demand for tankers.
“But the tanker supply has been growing even more quickly than demand. The main reason is that during the strong tanker market from 2005 to 2007 there was a pronounced shortage of ships and operators began construction to help alleviate the shortage. But it takes years to build a new ship, and those newly constructed tankers are just starting to enter the fleet. In 2011, the tanker market still faces some headwinds. With oil demand expected to grow by 1.5 million barrels per day, it’s likely more oil will need to be shipped out of the Middle East—since virtually all oil shipped out of the Persian Gulf is moved on tankers rather than pipelines, this spells growth in tanker demand of around 5% to 6%. But there is still a large number of new tankers due to hit global markets, driving supplies up around 7%.
“But the glut of tankers is projected to ease starting in 2012. The number of tankers due to leave shipyards drops sharply next year. And due to weak tanker- market conditions in recent years, companies have ordered fewer ships, meaning that growth in the global fleet is likely to slow even further in 2013 and 2014.
“Recent events have improved the outlook for the global tanker market. Civil war in Libya has removed as much as 1.5 million barrels of Libyan exports from the global market; Saudi Arabia has indicated it will replace the lost supply. But transporting oil from Saudi Arabia involves a lengthy tanker journey.
“Meanwhile, in the wake of the devastating earthquake and tsunami in Japan, as much as 10% of the nation’s power capacity is offline. To replace that capacity, Japan will restart a number of oil and diesel generators, pushing up the nation’s demand for oil by as much as 500,000 to one million barrels per day. And Japan is dependent on oil transported via ship. Tanker spot rates have rallied significantly from their December 2010-January 2011 lows but remain weak by any historical perspective. Weak rates have weighed on Teekay’s stock. While the company’s long-term time charter contracts shelter it from the worst of the spot market weakness, Teekay has been forced to cut its dividend payout from more than $1 per quarter in 2008 to just $0.22 more recently.
“But there’s room for improvement. With close to 60% of its ships locked-in under time charter contracts at attractive rates for 2011, Teekay should be able to at least maintain a $0.22 per quarter dividend this year even if tanker rates remain depressed. Even at that payout, Teekay is yielding 8.2%. But thanks to the recent surge in rates, the current consensus is that Teekay will be able to pay close to $1.15 per share this year, equivalent to a yield of around 11%.
Paul Tracy, High-Yield International, 4/1/11
