Information on the Target

Teekay Tankers completed a significant merger with Tanker Investments Ltd (TIL) on November 27, 2017, increasing its fleet size from 40 to 58 conventional tankers. The acquisition added 18 modern tankers, comprising ten Suezmax, six Aframax, and two Long Range 2 product tankers, which enhances Teekay's operational capabilities in the tanker sector.

The company reported a GAAP net loss of $1.9 million or $0.01 per share in the fourth quarter of 2017, while the adjusted net loss reached $5.9 million, or $0.03 per share. Despite these losses, Teekay managed to generate a cash flow from vessel operations of $32.1 million, reflecting strong operational performance.

Industry Overview in the Target’s Specific Country

The tanker industry plays a critical role in the global oil market, serving as a transportation link between oil producers and consumers. In 2018, the global demand for oil is expected to grow by an average of 1.5 million barrels per day, a positive outlook for the tanker sector. However, this coincides with OPEC supply cuts, which are temporarily decreasing the demand for tankers.

2017 saw the highest level of tanker scrapping since 2012, with significant reductions in fleet growth anticipated in 2018. The company estimates a modest 3% growth in the world tanker fleet for the year and 2% in 2019 as newbuild deliveries decrease. This decrease, combined with an increased rate of scrapping, positions the company favorably within a challenging marketplace.

Moreover, the U.S. crude oil production reached historic levels in 2018, exceeding 10 million barrels per day for the first time since 1970. This growth drives up U.S. crude exports—a positive trend for mid-size tanker demand and U.S. Gulf lightering requirements.

Overall, while the tanker market remains challenging in the near term due to persistent OPEC supply cuts and the need to absorb recent fleet expansions, the forecast suggests a gradual recovery by the end of 2018, aided by improving fundamentals.

The Rationale Behind the Deal

The merger with TIL was a strategic move to strengthen Teekay Tankers' market presence and operational scale. By enhancing its fleet with modern tankers, the company aims to capture increased market share in a recovering tanker market. Additionally, the five-year, $270 million debt refinancing facilitates a better debt maturity profile and lowers interest expenses, further supporting the merger's financial viability.

Information About the Investor

Teekay Tankers is a prominent player in the global tanker market, primarily focused on the transportation of crude oil and refined petroleum products. The company is listed on the New York Stock Exchange under the ticker symbol 'TNK' and operates a diversified fleet designed to serve the growing demands of oil transportation.

As part of the Teekay Corporation family, Teekay Tankers benefits from strong corporate governance, operational expertise, and a robust network of industry relationships. The company has a track record of focusing on strategic investments and operational efficiencies to enhance shareholder value.

View of Dealert

The merger with TIL represents a strategic opportunity for Teekay Tankers to consolidate its position in the crowded tanker market, increasing fleet size and modernizing its fleet. Given the anticipated rebounds in oil demand and improvements in supply-demand dynamics expected in late 2018, this move is timely. The refinancing of debt also adds further financial flexibility and reduces long-term costs.

However, the immediate financial losses in terms of adjusted net income may raise concerns among investors. It's crucial for the company to demonstrate a clear path to profitability post-merger, showcasing improved earnings per share as demand for crude oil continues to rise.

In summary, while the short-term metrics may be daunting, the strategic essence of the deal should foster long-term growth potential. The company’s ability to navigate through current challenges while leveraging its larger fleet could yield substantial value for shareholders in the near future.

In conclusion, Teekay Tankers' merger with TIL appears to be a well-considered strategic move that, while facing short-term losses, is well-placed for potential recovery and growth in the evolving landscape of the tanker industry.

View Original Article