Teekay Tankers (NYSE:TNK) is the oil tanker segment of the Teekay Group and one of the world's largest owners and operators of mid-sized crude tankers. The vast majority of my exposure in the Teekay Group is via Teekay Corporation (NYSE:TK). TK owns approximately 30% of TNK, making it the largest shareholder. Therefore, I have direct exposure to TNK by owning shares of TNK outright and indirect exposure via my stake in TK.
Earlier this year, we experienced one of the strongest tanker markets on record. Mid-size tanker spot rates in Q1 2020 were the highest since Q3 2008. Q1 2020 spot tanker rates were boosted by:
- elevated supply in March and April due to Russia-Saudi price war
- collapse in oil prices
- rise in floating storage
Despite this, TNK is down ~30% YTD. One would have expected the opposite.
As a result of the strong market, Q1 2020 results were the best in more than a decade. Specifically:
- Total adjusted EBITDA of $155.4M, up $22.6M from Q4 2019
- Adjusted net income of $110.0M (or $3.27 per share), up from adjusted net income of $83.0M (or $2.47 per share) in Q4 2019
- Quarterly EPS yield of 20.0% (annualized yield of 80.0%)
All in all, TNK was a cash machine generating over $140M of free cash flow. In addition, the company completed ~$60M of vessel sales at firm prices. Most importantly, this led to a massive reduction in debt, perhaps the key highlight of the quarter.
- Q1 2020 net debt was reduced by ~$200M, or over 20%, from Q4 2019.
- Net debt to total capitalization was reduced to 40.0% versus 48.4% in Q4 2019.
In normal times, this aggressive debt reduction would have taken years.
The strong free cash flow generation will substantially boost TNK's NAV. This applies to many other
