Teekay Tankers Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Welcome to Teekay Tankers Limited's Second Quarter 2023 Earnings Results Conference Call. As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the turn the call over to the company. Please go ahead.

Speaker 1

Before we begin, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the Q2 2023 earnings presentation. Kevin and Stuart will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward looking statements. Actual results may differ materially from results projected by those forward looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the Q2 2023 earnings release and earnings presentation available on our website.

Speaker 1

I will now turn the call over to Kevin McKay, Teekay Tankers' President and CEO to begin.

Speaker 2

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers' in the Q2 2023 Earnings Conference Call. Joining me on the call today are Stuart Andrade, Teekay Tankers' CFO and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation, Teekay Tankers generated total adjusted EBITDA of approximately $185,000,000 in the 2nd quarter, more than tripled the $58,000,000 we generated in the same quarter of last year. We reported adjusted net income of $149,000,000 or $4.38 per share, almost 6 times last year's in the range of $2,500,000 or $0.76 per share respectively.

Speaker 2

As a reminder, given our high operating leverage, for every $5,000 increase in day rates above our free cash flow breakeven of $16,000 per day. We expect to generate approximately $2.60 have a strong quarter. Our 2nd quarter results reflect this high operating leverage as our owned fleet and 8 vessels cartered in fleets generated a total of $170,000,000 of free cash flow. Participants are in line with our fixed quarterly dividend policy announced last quarter, we have declared a cash dividend of $0.25 per share for the in the Q2 of 2023. We have also continued to exercise purchase options on sale leaseback vessels, in this case, giving notice on an additional 4 vessels for $57,000,000 As previously mentioned, we will be refinancing these vessels participants are in the range of $350,000,000 revolving credit facility.

Speaker 2

Once repurchased in September, these 4 vessels will bring our total sale lease participants will provide repurchases to 19 vessels and $365,000,000 since March of 2023, participants are participating in the process of reducing our interest expense and giving us the ability to better manage cash and debt balances. In the market, we saw very strong spot rate for midsized tankers in the 2nd quarter, driven by strong Chinese and Indian oil imports as well as firm oil exports from both Russia and the United States. As we've moved into the 3rd quarter, all participants are in the quarter to date spot rates following a normal seasonal pattern, while remaining well above historical levels for this time of the year. We continue to believe that tanker supply and demand fundamentals are positioning the market well for both the coming winter participants have an extended period thereafter. Finally, we extended 2 chartered in vessels are an additional 12 months each at an average rate of $20,600 per day, while also securing a further 12 month option on 1 vessel are in the range of $25,000 per day.

Speaker 2

We remain active in managing a time charter book that has generated substantial incremental earnings and free be conducting a quarterly dividend of $18,000,000 in Q2 of this year. Turning to Slide 4, we look at recent developments in the spot tanker market. As noted, spot tanker rates remained very strong during the Q2. This was due to a combination of strong Indian and Chinese crude oil imports, an increase in Russian crude oil exports that reached a 3 year high with the majority of volumes moving long haul to India and China participants are in the U. S.

Speaker 2

Gulf with a large proportion continuing to be transported on midsized tankers to Europe. As is typical at this time of year, spot rates have moderated in Q3 to date, primarily due to seasonal factors. As an example, we have observed that Russian crude oil export volumes have decreased in the past few weeks, which we believe is due to an increase participants are in the range of $1,000,000 in Russian refinery throughput to meet summer demand, leaving less crude oil available for export. However, it's important to note that seasonally lower participants are in the chart indicate our prior Q3 earnings and show the current quarter averaging well above any Q3 seen in the last decade. In fact, rates in the quarter to date are higher than any quarter in the past decade with the exception of the most recent winter.

Speaker 2

As shown by chart, over the last 10 years, the seasonal dip in rates, which is typically observed during Q3, all participants have almost always reversed during Q4. And given the tanker market fundamentals, we expect this year to follow the same pattern. As we move into the Q4, the onset of winter seasonal factors coupled with rising oil demand through the second half of the year participants are in the Q3 to date, leading to another firm winter tanker market. Participants provide an update on our Suezmax and Aframax spot rates in the 3rd quarter to date. Average 3rd quarter to date rates have been historically strong.

Speaker 2

Based on approximately 48% 44% of revenue days booked, Teekay Tankers' 3rd quarter to date FUERMAX and AFRAMAX vessel bookings have averaged approximately $42,800 per day $48,300 per day, respectively. In both instances, well above the strong Q3 of 2022 spot rates. While current spot market participants have decreased from these very firm quarterly date rates. Rate volatility is expected, particularly in periods of market strength. Importantly, I would highlight the value being created by TNK's 8 vessel chartered in fleet given the continued market strength.

Speaker 2

With an average rate of $25,000 per day and 6 vessels trading in the spot market, the chartered in fleet has a current mark to market value of approximately $64,000,000 Turning to Slide 6, we look at some of the fundamental factors, which we believe will continue to support the strong tanker market over the next 2 to 3 years. Starting in the left column, Global oil demand remains very robust, driven by non OECD countries and in particular China due to a rebound in travel and petrochemical demand following the removal of COVID-nineteen restrictions. As per the IEA, global oil demand is set to increase by 2,200,000 barrels per day this year are expected to be in the range of $102,000,000 barrels per day with further growth of 1,200,000 barrels per day projected for 2024. Participants are in the OPEC plus group is uncertain, supply from non OPEC nations continues to grow. Participants are from Atlantic Basin Producers such as the United States, Brazil and Guyana.

Speaker 2

Given the demand growth is concentrated in the Asia Pacific region, an increase in long haul movements from the Atlantic to Pacific should be a positive driver participants are in the medium term. In the middle, we show average voyage distances continue to increase due to changing trade patterns as a result of Russia's invasion of Ukraine in early 2022. Have been moving long haul to India and China. Given that VLCCs cannot load directly from Russian ports, This change has primarily benefited the Aframax and Suezmax sectors. Although TNK does not carry Russian oil, overall Suezmax and Aframax sized vessels have benefited from the 14% increase in voyage distances since the start of last year.

Speaker 2

Importantly, we expect these trade pattern changes to be durable, meaning continued support for midsized tanker tonne mile demand for the global future. Finally, fleet supply fundamentals continue to look very positive with the tanker order book remaining at historic lows are around 5% of the existing tanker fleet. Although this year has seen an increase in tanker ordering when compared to Furthermore, the tanker order book is still small compared to the fleet of older vessels that may be phased out in the next few years, Meaning that fleet growth should remain low over the medium term. The shipyard capacity is now largely sold out for 2025 delivery. Low fleet growth over the medium term is all but set with approximately 2% fleet growth expected in this year participants are closely zero fleet growth in both 2024 2025.

Speaker 2

In sum, participants will retain our positive outlook for tanker rates over the next 2 to 3 years and believe that the factors which are supporting this upturn are durable in nature. Are in contrast to recent market upturns, such as in early 2020, which was driven by more short term and transitory factors. I will now turn the call over to Stuart to cover the financial slide.

Speaker 3

Thanks, Kevin. Turning to Slide 7, we highlight the significant shareholder value Teekay Tankers has created over the last 12 months and how well we are positioned to continue creating shareholder value. With 96% of our 53 vessel fleet trading in the spot market, the combination of TNK's high operating leverage and a firm spot market have demonstrated our ability to generate substantial free cash flow in recent quarters. As an illustration of that, over the past 4 quarters, The company has generated over $600,000,000 or $17.62 per share of free cash flow. Looking forward, if the Q2 2023 spot rates were achieved on average over the next four quarters, we would expect to generate a totaled about $19.50 per share in free cash flow.

Speaker 3

This equates to a free cash flow yield of approximately 45%. With our continued strong cash flows in the 2nd quarter, we decreased our net debt by $153,000,000 to just $28,500,000 Given the continued strength in the tanker market in the 1st part of the Q3, we are now net debt free, further supporting our ability to reinvest in the TNK fleet when the time is right and to return capital to our shareholders. However, we still have obligations related sale leaseback financings totaling approximately $210,000,000 $57,000,000 of which we will repay when we acquire 4 tankers in September. With purchase options on the remaining 8 vessels under sale leaseback arrangements available in Q1 2024. I will now turn the call back to Kevin to conclude.

Speaker 2

Thanks, Stuart. In summary, our discipline in capital allocation and the strong markets for midsized tankers have enabled us will be conducting a number of key strategic initiatives to build Teekay Tankers' balance sheet into excellent condition. Our fleet of spot market employed midsized tankers positions us well to generate a great deal of free cash flow moving forward. Sustainable multi year fundamentals participants will remain disciplined in deploying that cash under our capital allocation policy, and we believe that we are set up well to drive significant shareholder value creation. With that operator, we're now available to take questions.

Operator

Thank you. Our first question comes from the line of Jon Chappell with Evercore ISI.

Speaker 4

By. Thank you. Good afternoon or good morning. Stuart, if I can start where you left off, all participants are in the Q1. And you probably anticipated already because you already partially answered it.

Speaker 4

But with the rest of the sale leasebacks coming up in the Q1, having a pretty good line of sight on what that in being net debt free today. Do you anticipate just kind of saving up capital for that 1Q event where you can really clear the decks on the sale and leaseback? Or if there is a seasonal uplift, let's say, starting in the Q4, does that make that not really mutually exclusive with ratcheting up either a special dividend or maybe the base dividend.

Speaker 3

Thanks, John. I I think at this point, the we as you said, we've got good visibility on the 2 remaining groups of purchase options, which in total are about $200,000,000 So I don't think that's moving the needle significantly in terms of our near term thinking on the dividends. We announced just last quarter a change to our capital allocation policy of participants will be conducting a quarterly dividend policy of $0.25 per quarter. I don't think you're going to see a change to that in the near term, something that we continue to think about, but I wouldn't expect

Speaker 2

will be able to see a change to that in the

Speaker 3

near term. As you know, we've decided that we will use special dividends as the avenue for returning extra capital to shareholders and or using the share buyback program, which we announced last quarter. But that's something that we're going to look at on a more periodic basis, not something that we'll are doing on a quarter to quarter basis. So I think we'll probably wait to see how the next few quarters unfold and then make a call in terms of what we want to do on that side of things.

Speaker 4

Okay. Thank you. And then Kevin, good job laying out the market outlook or maybe this is Christian, too. Seasonality has come up a fair amount, as expected. We have a long history of that.

Speaker 4

However, I was just reading about with the Urals breaking the price are in the range of $60 per barrel, maybe some more disruption to the midsize fleet, and maybe in a not favorable manner of vessels that were trading Russian crude, still within compliance of the sanctions, now being fearful of violating those and coming back in the May train lanes may be putting some pressure on. Have you seen any of that yet? And does that really impact at all kind of your near term view on supply demand within your 2 core segments?

Speaker 2

Participants Hi, John. Yes. We have seen it. Obviously, going into all participants The current spot, top market right now, we have seen Europe and U. S.

Speaker 2

Gulf come off are in the same position. Quite significantly versus the Far East, which is still holding up at $30,000 a day. And I think some of that is a function of the drop in supply of Russian oil, which I think, Christian can probably confirm this, I think we've seen about a 20% drop in Russian oil exports since May. And that's just more oil, I think, is driven towards the refining I'll participate in the export market. But I think also with the price cap breach, all No, TNK doesn't participate in that trade, but from what we're picking up from people who do, there are still The ability to load Urals crude, for example, provided they get the attestation and some owners have indicated that they are getting those attestation Having said that, we have seen an increase in the tonnage lifts as a number of players who did participate in that, obviously haven't been able to get the attestation from their customers and they're now returning to our trade, which is putting some pressure on the immediate spot rate.

Speaker 2

Participants I think as we move forward, I think we'll see the volumes pick back up participants are going to maintenance in the fall. So that should be supported as we get into the 4th quarter participants Thanks, John. Thanks, John.

Operator

We'll go next to Omar Nakta with Jefferies.

Speaker 5

Thank you. Hey, Kevin, it's Stuart. Good morning. Just sort of looking to follow-up a little bit on the balance sheet. Are in a large amount and deleveraging pretty quickly.

Speaker 5

And as you mentioned, Stuart, you're in a net cash position. I guess maybe just first question on this is, you've exercised the 4 ships for the $57,000,000 Do you plan to utilize the $350,000,000 facility I'll sort of finance that purchase or do you really want to focus on just using cash to buy those out?

Speaker 3

Participants. Hi, Omar. Thanks for the question. It will depend on how the next participants are in the Q1 and for the 1st purchase options in September will depend on how the next quarter goes. And then for the others in Q1, again, it will depend on how much cash flow we generate.

Speaker 3

Really, whether we use cash on hand or need to draw on that revolver in order to finance those is more like a near term cash flow consideration as opposed to a significant decision, I guess, it just depends on if we have sufficient cash in the bank to make those repayments. All participants The vessels we are repurchasing will go into that facility and they will form this part of the security for that participants are in the facility, so we've prearranged it, so those vessels will go in there. But whether we need to draw to it in order to make that repurchase or not will just depend on the swap market.

Speaker 5

Participants Okay. Yes, I was just sort of trying to figure because clearly the obviously the depending on how the freight market goes from here, it looks like you could obviously pay down those you could exercise those options with cash, leave that facility alone and then you've got the 200,000,000 that you were mentioning that you could exercise next year, you could probably do that with cash as well. And so just wondering, is it an aim of yours to I'll get the balance sheet to completely debt free. You've eliminated the bank debt, you still have the lease debt. Can you envision is it a goal of yours to take Both the bank debt and the lease debt to 0 and still have a bit of cash on the balance sheet.

Speaker 3

Participants Yes. We haven't made a final decision on whether we're going to exercise the purchase options on the vessels in Q1, as I said, they are available and that's about $150,000,000 We haven't made that decision yet. But it is we may do that. And if we do, we would envision being completely debt free with cash on the balance sheet. As we outlined when we introduced the capital allocation in the quarter.

Speaker 3

And just to remind everybody, our number one priority is to build capacity for making reinvestments in the fleet at the right time all participants are in the range of $1,000,000,000 and that is one of the things that we're focused on. We haven't acquired a tanker since are in 2017, so it's been quite a long time. We've been focused on being disciplined and getting our balance sheet in order. But as a result, we do have significant investments that we could make if the opportunities arise and we're really trying to prepare ourselves for that. The reason that we're generating all of this cash flow at the moment is because we have 53 vessels trading because we made investments in our tanker fleet in the past.

Speaker 3

And our view for the long term value creation for shareholders is that we need to reinvest and we're going to do that in a disciplined way when the opportunities arise.

Speaker 5

Okay. Thank you. That makes sense. And I guess we'll see how those opportunities start to play out. All participants Just one final follow-up and just back to the debt.

Speaker 5

I saw in the release you mentioned that you've terminated or canceled a $65,000,000 credit participants are in the same store next year. It was undrawn. Just wondering kind of out of curiosity, what was the reasoning for terminating that?

Speaker 3

Participants Yes. Given our liquidity at the end of Q2, which you saw is over $600,000,000 We didn't really need have the need for the extra liquidity that that facility provided to us. Of course, all revolving credit facilities or our revolving credit facilities in any case have a carrying cost. And it was just really an optimization decision to avoid the cost of having that extra availability when we don't really need it and we're all accumulating cash flow quite quickly from operations. So it really an optimization decision.

Operator

Go next to Ken Hoexter with Bank of America.

Speaker 6

Hey, this is Nathan Ho dialing in for Ken. I just have a quick housekeeping question. First, I see in the presentation there's a slight pickup in your free cash flow breakeven TCEs to $16,000 from $15,000 last quarter. All participants And this is in spite of some pretty impressive deleveraging moves. Could you maybe just walk me through the math there on what's driving that

Speaker 3

Hi, Anthony. Thanks for the question. I don't have a breakdown of participants will be able to provide detail on that, but I will the big picture reason for the increase is that we've extended some time charters at incrementally higher rates than we had all participants are in the range of $25,000 a day, which is obviously very, very compelling versus current freight markets. All participants are in the range

Speaker 5

of $1,000,000,000. So it makes a

Speaker 3

lot of sense to be extending those time charters, but some of them are at incrementally higher rates than they were before, and that's the primary driver behind the Increase the breakeven. We can take it offline to give you the help you with the to bridge that specifically if you'd like.

Speaker 6

Got it. Okay. That's super helpful. And just maybe continuing on that point, it sounds like a lot of the capital decisions seem to be a little contingent on how the spot market performs and an impressive $64,000,000 mark to market on the charter in contracts. All participants could we anticipate some actualizations of those mark to market gains?

Speaker 6

As in Could we possibly see a slight increase in the time charter exposure or a slight decrease in the 96% spot exposure?

Speaker 2

Participants. Hi, Nathan. Yes, I think, I mean, we said this all participants are on calls in the past. We're always keeping an eye on the spot market relative to the time charter market or vice versa. All participants are in charter fleet, we have 8.

Speaker 2

And we actually made the decision several quarters ago to put I'll lock in that margin and crystallize the gain on those. Similar with our fleet, as opportunities arise, we will compare them with what we think our forward view of the all market is and if the opportunity is compelling and adds more value, we'll lock in. But it's not something that we all participants are very opportunistic. It's always reflective of what gives us the best return participants Over that period of time, thought versus time cover.

Speaker 6

Got it. That's clear. Thank you very much.

Operator

There are no other questions at this time.

Speaker 2

Thank you very much for joining us and we look forward to speaking with you again next quarter. Goodbye.

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