Teekay Tankers: Tanker rates remain high (NYSE:TNK)

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A few months ago, I wrote an upbeat article about Teekay Tankers Ltd. (New York Stock Exchange:TNK), arguing that high tanker tariffs could be sustainable due to Russian disruption of shipping lanes. Since my article, TNK stocks have rallied more than 60%, far outperforming the S&P 500, which has been mired in a deep bear market.

Recent quarterly results from TNK suggest that my bullish thesis continues as Russian crude oil is redirected to far flung countries like India and China. Europe is also replacing Russian crude with oil from the Atlantic basin, increasing tanker utilization and rates. TNK continues to be one of the best positioned, with 98% of its fleet operating in the spot market. However, investors should take into account the slowdown in the global economy, which may lead to further OPEC+ production cuts that may hurt the seaborne oil trade.

Brief company overview

Teekay Tankers Ltd. operates a fleet of 51 crude and product tankers, including 25 Suezmax, 9 Aframax, 1 VLCC and 9 LR2 operating on the spot market (Figure 1).

TNK fleet

Figure 1 – TNK Fleet as of November 2022 (TNK Press Release Q3/2022)

Revisiting the bullish thesis

A quick refresher for those unfamiliar with the crude tanker bull thesis. My bullish thesis on crude tankers and TNK in particular is that spot tanker rates will stay ‘higher for longer’ due to EU sanctions on Russian crude imports and redirection of Russian crude exports. Russian oil to the Far East.

Historically, Russian exports of crude oil and petroleum products were shipped to nearby ports such as the Port of Rotterdam in the Netherlands. However, as the EU has banned the import of Russian oil, European refiners have to replace nearby Russian crude with long-haul crude from the Middle East and the Atlantic basin. In addition, sanctioned Russian crude must be transported to far flung countries like India and China to find a home.

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Essentially, we are replacing the 5-day short-haul trips between St. Petersburg and Rotterdam with long-haul trips between St. Petersburg and China or Houston to Rotterdam. TNK has an excellent slide detailing the change in seaborne oil flows, reproduced below as Figure 2.

Oil flows transported by sea

Figure 2 – Seaborne Oil Flows Due to Russian Sanctions (TNK Q3/2022 Presentation)

This change in oil flows has led to elevated tanker spot rates, as tankers are placed on long-distance voyages. Figures 3, 4 and 5 show the spot rates for the Suezmax, Aframax and LR2 tankers, respectively.

Suezmax Spot Rates

Figure 3: Suezmax Spot Rates (Teekay Market Outlook)

Aframax Spot Fees

Figure 4 – Aframax Spot Rates (Teekay Market Outlook)

LR2 Spot Rates

Figure 5 – LR2 Spot Rates (Teekay Market Outlook)

Full effect of sanctions yet to be felt

According to TNK management, although we have started to see Russian crude flows turn around as described above, the EU continues to import significant amounts of Russian crude (1.5 million b/d) and refined products (0.8 million b/d) in September. These flows are scheduled to cease in December and February, respectively, when all sanctions come into effect. Therefore, the tanker market is expected to become even tighter in the coming months.

The latest quarter suggests a strong end to the fiscal year

In the third quarter just released on November 3, 2022, TNK reported revenue of $279 million (+141% year-over-year) and adj. EPS of $1.70, both well above Wall Street estimates.

Importantly, while Q3 2022 spot rates were strong at $33,200/d for Suezmax and $35,900/d for Aframax tankers, Q4 YTD rates were even higher, with TNK reporting $40,000/d for the Suezmax fleet, $36,600/d for the Aframax fleet, and $44,700 for the LR2 fleet (Figure 6). This bodes well for the next Q4 report and potentially for 2023.

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TNK QTD Spot Rates

Figure 6 – TNK QTD Spot Rates (TNK Press Release Q3/2022)

TNK is printing money at current rates

The beauty of the crude tanker business is that operating costs are relatively fixed, so when we have a period of high rates, the business can generate huge amounts of free cash flow. TNK’s entire fleet cash flow breakeven is a tanker rate of ~$15,000/d. Above this level, every $5,000 in tanker fees will translate to $85 million or $2.50/share in FCF.

Based on current tanker rates, TNK estimates that it can generate $12.50/share in FCF over the next 12 months (Figure 7).

TNK generates a lot of FHR

Figure 7: TNK can generate $10-12 in FCF at current rates (TNK Submission Q3/2022)

At $34 per share, TNK is trading at a lofty FCF return of over 30%. If high tanker rates persist in the coming quarters, investors can expect the company to be essentially debt-free by the end of 2023.

When TNK was first formed in the 2000s, the company paid a substantial dividend of $2.79 in 2008 and $1.86 in 2009. As TNK regains balance sheet strength, the company may reestablish some type of return of capital for shareholders.

storm clouds on the horizon

While I remain bullish on TNK based on the potential for higher spot rates for tankers heading into 2023, investors should note that economic storm clouds are gathering on the horizon. As recently as October, in response to weakening global growth and oil prices, OPEC+ announced 2 million b/d in production cuts. While the actual cuts are closer to 1 million b/d, as many OPEC+ countries were not producing up to their quotas, the production cut symbolizes potential risks to seaborne oil flows. In particular, with Probability of recession in the US recently reaching 100%there are downside risks to world oil consumption.

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On the positive side, recent developments outside of China suggest a possible relaxation of the draconian zero-COVID policies that have hampered Chinese oil demand so far in 2022, with the IEA forecast the first year-over-year drop in Chinese oil since the 1990s. As the world’s largest oil consumer, any change in Chinese oil consumption will have a far-reaching impact on seaborne oil trade.


In conclusion, I continue to believe that tanker spot rates will stay higher for longer as Russian crude oil is redirected to far flung countries like India and China. Europe will have to replace Russian crude with oil from the Atlantic basin, which will increase tanker utilization, leading to higher tanker rates. TNK stands to benefit the most, as 98% of its fleet operates on the spot market. However, investors should take into account the slowdown in the global economy, which may trigger further OPEC+ production cuts and hurt the seaborne oil trade.

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