Oil and gas shipping company Teekay Tankers Ltd (NYSE:TNK) has the wind at its back with a favorable industry environment. Despite mixed performance in Q4, the stock is up roughly 20% over the past year. The current price suggests the stock is undervalued relative to the company’s healthy financial position and robust expectations for 2024.
Anchors Aweigh
Operating a fleet of 52 tanker vessels, Teekay Tankers provides marine services to the global oil and natural gas industries.
The company had a strong year in 2023 but finished Q4 with mixed results. Revenue beat expectations, coming in at $313.3 million vs. $211.83 million, while EPS of $2.91 missed the Street’s target of $3.42.
Management expects 2024 to be equally strong as the year prior and projects Q1 revenue of $194.46 million (vs. consensus $182.74 million).
Favorable Seas
The industry dynamics are favorable for Teekay. The crude oil tanker market shows declining fleet growth and increasing oil demand, which is expected to result in rising tonne-mile demand, driving growth and profitability.
The ongoing attacks on merchant shipping in the Red Sea area have substantially impacted the patterns of tankers. In response to the rising tensions, numerous ship owners and operators have chosen to circumnavigate the hazard, opting for lengthier routes that significantly expand voyage time.
This rerouting creates an increased demand for tankers and drives up spot rates. In the recent Q4 earnings call, CEO Kevin Mackay shared that for every $5,000 increase in tanker rates above the company’s free cash flow breakeven ($16,000 per day), they expect to generate approximately $2.50 of annual free cash flow per share. Tanker spot rates are currently around $40,000 per day (depending on the tanker size).
Valuation and Technical Indicators
TNK stock has been trending up in the past year, though it has pulled back over the past month, exhibiting a break in upward price momentum. Its recent share price of $53.79 is a bit past the midway point of its 52-week range of $35.00-$64.42.
Technical indicators are neutral to bearish, with the stock trading below the 20-day moving average price of $55.70 and a 50-day moving average price of $55.12. The flagging price momentum suggests the stock may continue to be rangebound to negative in the near future.
However, the relative valuation and enterprise metrics suggest the stock is undervalued at this price level. The P/E of 3.6x is below the Oil & Gas Midstream Industry average of 8.5x, and the P/S of 1.4x is below the industry average of 1.8x.
Is TNK a Buy, Hold, or Sell?
Analysts covering TNK stock have been bullish, though Q4 results have caused some revisions in the estimated price target. For instance, post-earnings, BofA analyst Ken Hoexter revised the target price from $72 to $65 while maintaining a Buy rating.
TipRanks lists TNK as a Strong Buy based on four unanimous Buys in the past three months. Based on the 12-month price targets from these analysts, the average target is $71.25, with a range of $65-$77. This price target represents a 32.46% upside from current levels.
Red Skies at Night, Sailors Delight
Given the changing dynamics in the shipping industry, rising oil demand, and declining fleet growth, the opportunity appears promising for Teekay. Despite some earnings-per-share volatility and the potential for further short-term price correction, above-average sales, low financial leverage, and attractive valuation make for a strong investment case for long-term value investors.
