Why Teekay Tankers has high liquidity and leverage ratios
With TK evolving from a small player to global marine midstream service provider, the company has garnered significant advantages and a strong standing in the industry. Through its three daughter subsidiaries—TGP, TOO, and TNK—TK has developed an ability to generate high cash flow for its investors. Also, it’s able to maintain its capacity to distribute consistent dividends and grab attractive investment opportunities at the same time.
Two of the three daughter subsidiaries—TGP and TOO—are among the top fund holdings of the Guggenheim Shipping ETF (SEA).
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As of March 31, 2014, TNK records total liquidity of $149.4 million (which consisted of $27.1 million of cash and $122.3 million in an undrawn revolving credit facility), compared to total liquidity of $173.9 million ($25.6 million cash) as of December 31, 2013. Giving pro forma effect to the $154 million in aggregate proceeds from the sale of two VLCC tankers in early May 2014, TNK’s liquidity as of March 31, 2014, was approximately $300 million.
TNK believes that the $300 million liquidity gives it a bit of near-term capacity to act quickly on any on-the-water acquisition opportunities. Also, TNK supports the balance sheet capacity in order to support increased leverage through in-charters as well.
Strengthening liquidity through term loan investment monetization
Through the monetization process of the term loan (undertaken for two 2010-built VLCCs), TNK managed to sell these vessels to TIL for $154 million, compared to the fair value of $144 million. This has helped the company attain a stronger position in its cash balance. Besides this, TNK recognized $9.1 million of interest income owing under the loans.
A high debt-to-equity ratio indicates that the company is aggressive in financing its growth with debt. TNK largely looks out to develop its fleet size in order to have a balanced mix and garner significant earnings. TNK records debt-to-equity of 273.65%. TNK’s peers, Frontline Ltd. (FRO), Nordic American Tankers (NAT), and DHT Holdings (DHT), record 18,991.1%, 29.24%, and 54.8%, respectively.
The higher the debt-to-assets ratio, the higher the degree of the company’s leverage. With a debt-to-assets ratio of 68.89%, TNK is standing lower than Frontline Ltd., recording 94.36%. Other peers NAT and DHT are recording debt-to-assets ratios of 22.0% and 34.94%, respectively. With a higher debt-to-assets ratio, the company accounts for higher interest expenses, thereby affecting its profits. Also, a higher ratio indicates that NNA’s financial risk profile is improving.
Finally, let’s take a look at the market outlook and company valuations supporting investor interest in the next part of this series.