- TNK is benefiting from the strength in the tanker market. The company delivered better than expected first-quarter results, and took delivery of five new ships and added two chartered-in vessels.
- In my view, the strength in the tanker market will continue at least in the next few months due to low global oil prices and high crude oil supply.
- Although TNK stock is already up 48.4% year-to-date, in my opinion, the stock still has more room to grow, and it is a Buy right now.
Teekay Tankers (NYSE:TNK), the world's largest operator of mid-sized tankers, is benefiting from the strength in the tanker market. The company delivered better than expected first-quarter results, and its stock is already up 48.4% year-to-date while the S&P 500 index has increased only 1.7%, and the Nasdaq Composite Index has risen 6.7%. Since the prices of oil continue low at least in the next few months, TNK should continue to prosper, and its stock could go higher.
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Chart: TradeStation Group, Inc.
Company Description
Teekay Tankers is engaged in the marine transportation of crude oil and refined petroleum products through the operation of its oil and product tankers worldwide. Teekay Tankers currently owns a fleet of 32 double-hull tankers, including 12 Aframax tankers, ten Suezmax tankers, seven Long Range 2 product tankers, three Medium-Range product tankers, and has contracted 12 time charter-in tankers. Teekay Tankers' vessels are employed through a mix of short- or medium-term fixed-rate time charter contracts and spot tanker market trading. The Company also owns a Very Large Crude Carrier through a 50 percent-owned joint venture. The company was founded in 2007 and is headquartered in Hamilton, Bermuda.
Latest Quarter Results
On May 14, Teekay Tankers reported strong first quarter 2015 financial results, which beat EPS expectations by $0.01 (3.0%). The company posted revenue of $103.9 million in the period, which also topped the average Street forecast for revenue of $97.2 million. The company showed earnings per share surprise in the last two-quarters after missing expectations in its two previous quarters, as shown in the table below.
Source: Yahoo Finance
The company experienced the strongest quarter in six years with free cash flow of $53 million, or $0.46 per share, resulting in an annualized free cash flow yield of 32 percent based on the average share price during the first quarter.
In the report, Kevin Mackay, Chief Executive Officer of Teekay Tankers, said:
Over the past four months, crude spot tanker rates have achieved the highest average levels since the strong winter market of 2008. The continued strength in the tanker market reflects the strong tanker market fundamentals on the back of a shrinking mid-size tanker fleet, increased crude oil trade volumes and growing global oil demand. Low global oil prices, high crude oil supply, and seasonal factors such as increased oil demand and winter weather delays, have provided further support to the crude tanker market during the first quarter. Crude spot tanker rates have remained counter-seasonally strong into the second quarter of 2015 due to record-high Saudi Arabian oil production and a relatively light refinery maintenance schedule as refiners continue to take advantage of positive margins.
Since TNK has approximately 85% of its fleet operating in the spot tanker market over the next 12 months and a low cash break-even rate, the company is well-positioned to benefit from the fundamental strength in the global tanker market. In the quarter, on average TNK's spot Suezmax fleet earned $39,400 per day, its Aframaxes earned $30,700 per day, and its LR2s earned $24,900 per day.
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Source: Earnings Presentation
In my view, the strength in the tanker market will continue at least in the next few months due to low global oil prices and high crude oil supply. Lower oil prices that are driving onshore strategic, and commercial stockpiling and refinery throughput has remained high as refiners take advantage of strong refining margins. In addition, according to Teekay Tankers, fleet supply growth will remain low into 2017. Also, the fact that the company took delivery of five new ships and added two chartered-in vessels during the last quarter demonstrates management belief in the continuing strength in the tanker market.
Valuation
TNK'S valuation metrics are very good, the trailing P/E is very low at 10.11, and the forward P/E is even lower at 7.44. The enterprise value/EBITDA ratio is at 14.36, and its PEG ratio is very low at 0.99.
The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
The company is paying a dividend. The forward annual dividend yield is at 1.60%, and the payout ratio is only 17.9%.
Ranking
According to Portfolio123's "Balanced4" ranking system TNK stock is ranked first among all Russell 3000 stocks.
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The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information, as shown in the Portfolio123's chart below.
Back-testing over fifteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.
Summary
Teekay Tankers is benefiting from the strength in the tanker market. The company delivered better than expected first-quarter results, and took delivery of five new ships and added two chartered-in vessels. In my view, the strength in the tanker market will continue at least in the next few months due to low global oil prices and high crude oil supply. Since TNK has approximately 85% of its fleet operating in the spot tanker market over the next 12 months, the company is well-positioned to benefit from the fundamental strength in the global tanker market. The company has compelling valuation metrics and solid earnings growth prospects; its PEG ratio is very low at 0.99. Furthermore, TNK stock is ranked first among all Russell 3000 stocks, according to Portfolio123's "Balanced4" ranking system. Although TNK stock is already up 48.4% year-to-date, in my opinion, the stock still has more room to grow, and it is a Buy right now
By Arie Goren
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