<

Must-know company overview: Is Teekay Tankers undervalued?

Part 5
Must-know company overview: Is Teekay Tankers undervalued? (Part 5 of 7)

Why Teekay’s strategy and balanced mix mean a compelling yield

Key strategy

The time chartering strategy of Teekay Partners Ltd. is to actively manage its fleet of double-hull vessels through a mix of fixed-rate charters and spot tanker market trading and provide a compelling yield to investors. The company captures upside opportunities in the spot market benefitting investors while having downside protection in high or low markets. On the basis of its freight rates outlook, TNK decides on employing its chartering strategy.

Total Fleet TableEnlarge Graph

With peers like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), and DHT Holdings Inc. (DHT), TNK’s balanced charter strategy supports its compelling yield in the market. TK and its two master limited partnership subsidiaries are part of the Guggenheim Shipping ETF (SEA).

TNK reaps the benefits of TK

Teekay Tankers and Teekay Corporation (TK) not only foresee a beneficial position from the recovery in spot tanker markets but also predict higher fee revenue. This is mainly because vessels under management are rising for TNK through Teekay entities and TIL is obligated to use Teekay Operations or new arrangements with third-party ship owners.

Teekay Tankers’ spot-traded vessels continue to benefit from the enhanced scale advantages and fleet utilization that come with trading in commercial tonnage pools. The Teekay Aframax, Taurus Tanker LR2, and Gemini Suezmax pools enable TNK to gain the advantages of operating within a significantly larger fleet of interchangeable vessels, resulting in enhanced utilization.

Plus, strong sponsorship from Teekay Corporation and its ownership of an additional 17 tankers suitable for dropdown to TNK provide built-in growth opportunities.

TNK vessels

As of May 1, 2014, 13 of TNK’s vessels—including its 50% owned VLCC—are trading under fixed-rate time charter contracts. The remaining 16 vessels in the current fleet are operating in the spot market through Teekay-managed commercial tonnage pools, with the exception of two MR product takers, which are trading in an externally managed pool.

However, looking ahead to the upcoming 12 months, TNK foresees a greater portion of its fleet trading in the spot tanker market as current time-charters expire and also due to an expected improvement in spot rates. Supporting its belief in improving tanker market fundamentals, TNK has decided to reduce its fixed-rate coverage to almost 34% from February 2014 to the first quarter of 2015.

Let’s take a look at the company’s conservative balance sheet, which is highly leveraged coupled with a strong cash balance, in the next part of this series.

The Realist Discussions