U.S. crude oil production surged from 5.2 million barrels per day (b/d) in 2005 to 12.9 million b/d by 2023, driven by advancements in shale technology.

This growth turned the U.S. into a leading oil exporter, boosting demand for marine transportation.

Teekay Tankers (TNK), a debt-free company operating a fleet of mid-sized tankers, is poised to benefit from rising U.S. export volumes, geopolitical shifts, and a tight tanker supply market.

However, concerns over the aging fleet and the cyclical nature of the tanker market temper optimism.

The market expects a sharp drop in Teekay’s future returns, but fleet renewal plans and favorable dynamics could sustain its growth.

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In 2005, U.S. crude oil production was approximately 5.2 million barrels per day (b/d).

Advancements in hydraulic fracturing and horizontal drilling led to a significant increase in production, reaching 12.9 million b/d in 2023, surpassing previous records.

This production boom resulted in a surplus, prompting policy changes. In December 2015, the U.S. lifted its 40-year ban on crude oil exports, allowing producers to access global markets. Consequently, crude oil exports rose from minimal levels to over 4 million b/d by 2023.

The expansion of crude oil exports has bolstered the U.S. economy, reduced the trade deficit, and enhanced energy security.

Once heavily dependent on imports, the U.S. now stands as a leading exporter of crude oil and refined products.

This surge in exports benefits the entire O&G supply chain, from producers to transportation and service firms.

As demand rises, investments in O&G export, exploration, and related infrastructure are poised to capitalize on this ongoing “shale renaissance”.

Teekay Tankers (TNK), a player in crude oil and refined product transportation, is well-positioned to capitalize on this trend.

The company operates a fleet of mid-sized crude oil and refined product tankers. Its portfolio includes Suezmax, Aframax, and LR2 vessels, complemented by ship-to-ship support services and tanker commercial management operations.

Teekay primarily engages in the spot market, which allows it to benefit from fluctuations in tanker day rates.

As global oil trade increases, driven by the U.S.’s rising export volumes and geopolitical shifts, the company’s business is poised for growth.

The Ukraine-Russia conflict, for example, has disrupted traditional oil supply routes, forcing Europe to source oil from the U.S., the Middle East, and Africa via tankers.

This shift has increased demand for marine transportation and extended ton-mile demand. Additionally, the Trans Mountain Pipeline expansion in Canada has contributed to tanker demand by diverting shipments to new markets.

The tanker market is currently benefiting from several favorable dynamics. According to industry data, 2024 is set to witness the lowest number of new tanker deliveries in three decades.

Shipyard capacity is nearly fully booked through 2027, limiting fleet growth at a time when global oil demand is expected to rise by 1.5 million barrels per day annually through 2025.

OPEC+’s decision to end oil production cuts will add another 2.2 million barrels per day to the market starting in late 2024.

These factors create a supply-demand imbalance that supports high spot rates, particularly for mid-sized tankers like those operated by Teekay.

The company’s one standout achievement is its debt-free status, achieved after repaying $137 million in debt earlier this year.

This financial flexibility allows the company to pursue strategic opportunities, including fleet renewal, without being burdened by interest expenses.

All these factors combined enabled Teekay to achieve a 32% Uniform return on assets ”ROA” last year.

However, the market is still concerned about the cyclical nature of the tanker market.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to 4%, below the cost of capital…

The market’s pessimistic view is caused by the average age of Teekay’s fleet, with 50% of its vessels over 15 years old, and cyclicality. Aging ships can lead to higher maintenance costs and reduced operational efficiency.

Management has indicated plans to renew the fleet, potentially using cash reserves or new financing options.

As the U.S. solidifies its position as a top oil exporter, marine transportation will remain a vital link in the energy supply chain.

With its fleet and favorable tailwinds, Teekay is well-positioned to navigate the opportunities ahead.

Meanwhile, the stock market remains resilient. Major indexes are steady. And businesses are continuing to grow and reward investors.

Companies like PepsiCo thrive in stable markets like these. The choice is clear.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research