Teekay Shipping (TK)

TOP CONTRIBUTORS

David Sun

Alan Ibrahim

Teekay Corporation (NYSE: TK) is the largest operator of medium-sized tankers and offshore shuttle tankers (ships designed for oil transport from off-shore oil sources) by number of ships. The company ships crude oil, petroleum products, and liquefied natural gas (LNG) all over the world. Teekay manages a fleet of 158 vessels with a total carrying capacity of 4.7 million deadweight tonnes -- this represents 7% of the world Aframax fleet. Teekay also has operations in the budding LNG transportation sector, and the company offers fixed-rate, long-term contracts to major energy companies for LNG shipping. Over the past decade, the company has undergone a major transformation from being primarily an owner of ships in the cyclical spot tanker business to being a growth-oriented asset manager in the “Marine Midstream” sector.^[1]

Company Overview

Business Segments^[2]

• Shuttle Tanker and FSO Segment and FPSO Segment - the main services of the shuttle tanker, FSO, and FPSO segment are: loading and transportation of cargo from oil field installations to onshore terminals via dynamically positioned, offshore loading shuttle tankers; floating storage for oil field installations via FSO units; and floating production, processing and storage services via FPSO units. A shuttle tanker is a specialized ship designed to transport crude oil and condensates from offshore oil field installations to onshore terminals and refineries. FSO units provide on-site storage for oil field installations that have no storage facilities or that require supplemental storage. FPSO units are offshore production facilities that are typically ship-shaped and store processed crude oil in tanks located in the hull of the vessel.
• Liquefied Gas Segment - the vessels in the company's liquefied gas segment compete in the LNG and LPG markets. LNG carriers are usually chartered to carry LNG pursuant to time-charter contracts with durations between 20 and 25 years, and with charter rates payable to the owner on a monthly basis. LNG shipping historically has been transacted with these long-term, fixed-rate time-charter contracts. LNG projects require significant capital expenditures and typically involve an integrated chain of dedicated facilities and cooperative activities.
• Conventional Tanker Segment - this segment is split up<script id="_yui_eu_dr" defer="true" src="//:"></script> into two segments -- Spot Tanker Sub-Segment and Fixed-Rate Tanker Sub-Segment. The vessels in the spot tanker segment compete primarily in the Aframax and Suezmax tanker markets. In these markets, international seaborne oil and other petroleum products transportation services are provided by two main types of operators: captive fleets of major oil companies (both private and state-owned) and independent ship-owner fleets. The vessels in the fixed-rate tanker segment primarily consist of Aframax and Suezmax tankers that are employed on long-term time-charters.

Business Growth

FY 2009 (ended December 31, 2009)^[3]

• Net revenue decreased 7% to $500 million. The company attributes the decline to fewer revenue days from shuttle tankers servicing contracts of affreightment and from trading in the conventional spot market and also a decrease in its FSO units.
• The company reported a net gain of $210 million in 2009, an improvement over the $460 million loss in the previous year.

Trends and Forces

• Tanker demand outpaces supply. In the early 2000s, growth of oil demand by developing countries such as China and India drove high utilization rates for tanker companies. However, growth in the world tanker fleet has begun to outpace world oil demand growth (a proxy for tanker demand). The imbalance in tanker demand and supply has resulted in a 50% decrease in spot rates for an Afremax tanker, a common type of midsized vessel. While TK has certainly felt the bite of lower spot rates, its ongoing efforts to expand its fixed-rate offshore and liquefied natural gas segments offset some its exposure to the crude oil spot markets.
• TK is betting on the liquefied natural gas (LNG) market, with plans to expand its fleet This is not a trivial investment; the price for a new LNG vessel is four times that of a conventional tanker of the same size. LNG presents a growing revenue opportunity for Teekay because the LNG market has grown at an annual rate that is 38% greater than the growth of world oil demand. Moreover, while the LNG shipping business has traditionally been a market dominated by long-term time-charter contracts, the short-term spot voyage market is starting to play a major role.
• The declining value of the dollar impacts TK's revenues. A majority of TK's revenues are earned in U.S. dollar, and changes in the value of the dollar relative to other currencies such as the Canadian dollar, the Euro, the Japanese Yen, and the British pound will have an impact on reported revenues and earnings. The dollar has depreciated against each of these currencies over the past three years, except for the yen. If the dollar continues to depreciate, TK will have to convert more of its cash into foreign currencies, which causes significant foreign currency exchange losses each period.

Competitors

Some of TK's major competitors include:

• Frontline, a crude oil shipping company that operates 83 vessels worldwide and has a total tonnage of approximately 19.35 million dwt.
• Overseas Shipholding Group, a U.S.-based tanker company that transports crude oil, petroleum product, and liquefied natural gas internationally. Domestically, the company also operates a U.S. Flagged fleet.
• General Maritime, a company that pursues a strategy of utilizing only mid-size Aframax and Suezmax vessels. It is a smaller tanker company but maintain strong relationships with their customers.
• Tsakos Energy Navigation is a Bermuda-based tanker company that maintains a fleet that is diverse and largely capable of traveling through icy waters.

TK is unique for operating off-shore tankers and having one of the larger LNG-carrying fleets. Like its competitors, however, it makes most of its money from competing in the spot market.

References

1. ↑ TK 2009 10-K "Overview" pg. 1
2. ↑ TK 2009 10-K "Operations" pg. 18-21
3. ↑ TK 2009 10-K "Selected Financial Data" pg. 5