Teekay Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 5 speakers on the call.

Operator

Welcome to Teekay Tankers Limited's First Quarter 20 24 Earnings Results Conference Call. During the call, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session. As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to the company.

Operator

Please go ahead.

Speaker 1

Before we begin, I would like to direct all participants to our website at www.teca. Com, where you will find a copy of the Q1 2024 earnings presentation. Kevin and Stewart 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.

Speaker 1

Additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the first quarter 2024 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin MacKay, TD Tanker's President and CEO.

Speaker 2

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Key Take Tankers' Q1 2024 earnings conference call. Joining me on the call today is Stuart Andrade, KeyKay Tankers' CFO and Christian Waldegrave, our Director of Research. Moving to our recent highlight on Slide 3 of the presentation. EBITDA Tankers generated total adjusted EBITDA of $151,000,000 up from the $127,000,000 we generated last quarter.

Speaker 2

The company reported adjusted net income of $132,000,000 or $3.86 per share, an increase from $100,000,000 or $2.91 per share in the Q4 of 2023. With our fleet of midsized tankers trading almost entirely in the strong spot market, keeping tankers' high operating leverage enabled us to continue generating significant earnings. As a reminder, for every $5,000 increase in tanker rates above our free cash flow breakeven of $16,000 per day. We expect to generate approximately $2.40 of annual free cash flow per share. Stuart will provide further information on this later in the presentation.

Speaker 2

In March, we completed the repurchase of the remaining 8 vessels on sale leaseback arrangements for $137,000,000 reaching the major milestone of being debt free. With our balance sheet strength, recent financial performance and the positive market outlook, we continue to take a balanced approach to capital allocation. In line with our capital allocation plan, we have declared a fixed quarterly cash dividend of $0.25 per share for the Q1 of 2024. In addition, we have declared a special dividend of $2 per share. Including these dividends, T2 Tankers has declared cash dividends of $4.25 per share since updating our capital allocation plan last year.

Speaker 2

KeyBancorp's midsize spot rates for the Q1 of 2024, the 2nd highest in the company's history, 2nd only to last year's spot rates. These spot rates have continued through the first half of the second quarter as well. The recent expansion of the Trans Mountain pipeline to Vancouver with first cargoes planned for this month would create a new source of Aframax demand, which is expected to support Aframax's fleet tanker rates as volumes ramp up over the coming months. I will talk more about this important development later in the presentation. Looking ahead, tanker supply and demand fundamentals remain positive and point toward continued intermarket strength in the medium term.

Speaker 2

Finally, we completed the previously announced sale of 12,004 Bill Athermax during the Q1 for total proceeds of $23,500,000 recording a gain on sale of $11,600,000 Turning to Slide 4, we look at the dynamics in the stock tanker market. As mentioned in the highlights, Q1 saw the 2nd highest midsize tanker spot rates for a Q1 in TP Tankers' history, 2nd only to the exceptional rates recorded in Q1 of last year. Rates were supported by a combination of factors, including 1 tanker ton mile demand, limited fleet supply growth, normal seasonality and trade route disruptions due to geopolitical events, which led to an increase in average voyage businesses. These factors have continued to support spot tanker rates during the Q2 with rates remaining at firm levels. Looking to the second half of the year, we expect the rates will remain well supported by rising oil demand and expected increase in crude oil supply from non OPEC countries, predominantly in the Atlantic basin and the start of exports from the newly expanded Trans Mountain pipeline.

Speaker 2

Turning to Slide 5, we provide an update on our Suezmax and Aframax size spot rates in the Q2 to date. Based on approximately 59% and 54% of revenue days booked. TT Tankers' 1st quarter to date Suezmax and Aframax sized vessel bookings have averaged approximately $45,100 per day $43,900 per day respectively. Importantly, I would once again highlight the value being created by PA Tankers 8 vessels chartered in fleet, of which 7 are trading in the strong spot market. With an average intra charter rate level of $25,400 per day, the chartered in fleet has a current mark to market value of approximately $54,000,000 Turning to Slide 6, we look at the impact of Trans Mountain Pipeline Expansion or PMX, which we believe will provide a significant boost to Aframax specific demand going forward.

Speaker 2

On May 1, the Trans Mountain pipeline expansion commenced commercial operations with 1st cargoes expected later this month. The new pipeline has a capacity to carry 590,000 barrels per day of Canadian crude oil for loading onto Aframax tankers, which is the maximum size of vessel you can load from the terminal due to draft restrictions. Given that the first cargoes have yet to load, there is still uncertainty regarding the ultimate destinations of the crews exported from TMX. However, we have identified 4 potential trades which could develop to bring this oil to market. First, given the characteristics of Canadian crude, we believe that the barrels are well suited to refineries in the U.

Speaker 2

S. West Coast, particularly in California, where cargoes would be transported directly on Aframaxes. Secondly, we expect that Asian buyers will look to acquire Canadian oil given its price discount for equivalent grades from other sources. This oil could be transported directly to Asia on Aframaxes and we've already seen one customer be seen in Aframax for May loading days with discharge in China. Alternatively, Asian buyers may find that their economies of scale can gain from parceling up Aframax cargoes to a larger VLCC or Suezmax.

Speaker 2

Most likely locations for these reverse light rings are in the Pacific Area Lightering Zone off the coast of Southern California or off Panama where other grades of Latin American crude may be co loaded. Again, we have already seen a customer taking this latter option, which reports that a major refiner has beat Astraxa's pump TMX for parceling up to a VLCC off Panama for onward delivery to India. These new trade routes are expected to increase Aframax demand going forward, particularly as Vancouver is relatively far from the main Aframax trade lanes in Asia and the U. S. Gulf, meaning that vessels will have to be pulled in from these regions to meet demand.

Speaker 2

To give some context, the distance from Vancouver to Southern California is around 1200 nautical miles and 12 voyage days on a round trip basis, including load and discharge time. While the distance from Vancouver to China is around 6,000 nautical miles or 44 voyage days. Assuming a fifty-fifty split between these two destinations, we estimate that the Trans Mountain expansion could create incremental demand for around 25 to 30 Alkermes once the pipeline is at full capacity. Turning to Slide 7, we look at supply and demand factors, which we believe support continued to enter market strength over at least the medium term. Fleet supply fundamentals continue to look positive.

Speaker 2

Despite an increase in the pace of e tanker orders in recent months, the tanker orders are too small by historic standards at 9% of the fleet delivering over the next 3 years. The order book is particularly small this year with just 2,400,000 deadweight tons of new tankers delivering to the fleet during the Q1 of 2024, which is the lowest delivery total for our Q1 since 1989. Furthermore, the tanker fleet is aged,

Speaker 1

the average age of the global fleet at its

Speaker 2

highest point since 2003, coming in at 13.2 years. While ships are not being scrapped in the current high spot rate environment, vessels that trade beyond age 20 are seeing a significant drop in utilization compared to the vessels below 20 years of age, thereby reducing effective fleet supply. As a result, we project close to 0 tanker fleet growth in 2024 with modest growth of around 1% in 2025. We see demand, the average forecast for the major oil agencies project healthy oil demand growth of 1,500,000 barrels per day in both

Speaker 1

20242025.

Speaker 2

The majority of this demand growth is expected to be met by increasing oil supply from the non OPEC countries, particularly from producers in the Atlantic Basin, which suggests that the tonne mile demand will continue to benefit from an increase in long haul movements from the Atlantic basin to Asia. As shown by the chart on the right of the slide, tanker tonne mile demand growth is expected to outstrip fleet supply growth both this year and next, continuing the trend that started in 2022. This compounding impact of demand growth exceeding supply growth should continue to support high levels of tanker fleet utilization and firm tanker rates through at least medium term. I'll now turn the call over to Stuart to cover the next slide.

Speaker 1

Turning to Slide 8, it highlights how well Sea Tankers is positioned to continue creating significant shareholder value in 2024, a year that we expect to be another strong tanker market. With 98% of our 51 vessel fleet operating in the strong spot tanker market that has been supported by the various factors we have talked about today, we feel confident in our ability to continue creating significant shareholder value. In the Q1, GamePay generated $156,000,000 or $4.54 per share of free cash flow. If we use the trailing 12 month average of K and K's realized spot rates to project that forward, our annualized free cash flow would be approximately $14 per share or a free cash flow yield of approximately 20 2%. As Kevin mentioned in his opening remarks, Teekay Tankers has reached the milestone by becoming debt free after repurchasing our 8 vessels on sale leaseback arrangements during the Q1.

Speaker 1

Based on a holistic assessment of the Company's position, including being debt free, continuing strong operating results, our desire to retain capital for fleet rejuvenation with a very positive market outlook, Gordon declared a special dividend of $2 per share for a combined dividend of $2.25 per share, including our regular quarterly dividend of $0.25 per share. With these dividends, TPA Tankers has returned capital to shareholders totaling $4.25 per share since announcing our revised capital allocation plan in May of last year. I will now turn the call back to Kevin to conclude.

Speaker 2

Thanks, Stuart. In summary, the key drivers of the strong markets and midsize tankers remains firmly in place. As we look ahead at the supply and demand, we are increasingly upbeat on the prospects over a multiyear period. In this environment, our high operating leverage continues to create significant value for Kingpin's shareholders. Our Board of Directors' decision to declare a special dividend reflects our balanced approach to capital allocation.

Speaker 2

While we continue to prioritize building capacity for fleet rejuvenation, Special dividend reflects our optimism about what lies ahead for our industry segment and our company. With that operator, we're now available to take questions.

Operator

Thank We'll go first to John Chappell with Evercore ISI. Your line is open. Please go ahead.

Speaker 2

Thank you. Good morning. Starting with the market one, maybe for Christian.

Speaker 1

Good morning, Kevin. Maybe for Christian, Kevin, you could answer as well, but the slide 4 on the right hand side is pretty interesting. I mean, there's a lot going on in this industry right now and a lot of geopolitical upheaval. Yet when I look at the 2,000,000 Africanized rates that put in 5,004, they're in a super tight range for the last 6 months, obviously at elevated levels, but within a pretty tight range. So just any commentary on why maybe some of the volatility is usually in this sector and one would conceptually think it's even elevated in this day and age is resulting in stable at strong rates in the 2 asset classes where you're primarily involved?

Speaker 3

Yes. Hi, John. Christian here. I think that was our kind of takeaway as well in that given everything that's going on in the world and all the events, it is interesting to see that our tank rates at least now because it's been quite consistent since winter. And normally during this part of the year, we would expect rates to fall seasonally, getting into kind of the shoulder season as refineries go into maintenance.

Speaker 3

And I think what's worked in our favor since the beginning of the year is a couple of those events, I think, have important to the time Martin Land. So you've obviously got constructions in the Red Sea because of the effect on merchant shipping, which has certain tanks going on longer voyages around the Cape Verde type. It has affected both crude and product, it's probably been more pronounced on the product side

Speaker 1

in the LR2s, but then

Speaker 3

we've seen some crude diversity as well. And then with the trading attacks on Russian refineries, we've also seen that Russian exports have stayed elevated as well. So I think there have been some factors there that have supported time for rates during what would ordinarily be a seasonally weaker part of the year. And that probably bodes well for the second half as well because as Kevin said in his prepared remarks, we now have the Transatlantic pipeline coming online and ramping up into Q2 here. We certainly expect volumes there to be important of that to make demand change the second half of the year.

Speaker 3

We should see more oil volume come online in the second half as well. So, yes, it's still a positive development, rates have stayed out of late through Q2 and that it gives us some confidence for the rest of the year here as well.

Speaker 1

And then just for my follow-up in the interest of swing the hit. Kevin, I think the special dividends being widely applauded today, you're down to a net cash position. So, I'm just not asking you to completely show your hand, but maybe just clarification on path from here. If you could just prioritize kind of how you think about this massive cash flow that Stuart pointed out in the coming quarters. How would you prioritize the uses of capital, let's call it, through the rest of 'twenty four and through 'twenty five?

Speaker 2

Yes. It's obviously a fantastic situation to be in after the markets that we've had to come through over the last few years. It's something that as a management team and in touch with our Board, we're always looking at and always trying to discuss. We do have fleet renewals to look at. And although pricing today is elevated on both newbuilds and secondhand, There is a need for us to replenish as we sell ships.

Speaker 2

We still want to keep exposure to the spot market because of the confidence we have in the underlying fundamentals of the market. So as we roll off some of the older ships, you may see us use some of that capital to reinvest and keep our spot exposure at a high level. So some of the cash may be used for that. We also have to look beyond that and look to the future as to doing larger fleet rejuvenation exercises, which we're not advocating to do now, but we are cognizant of the cyclicality of the market and keeping that powder dry for that use is important to for us to be able to provide long term value to shareholders. And then obviously, we understand and fully respect that shareholders would like a yield.

Speaker 2

And in that respect, our capital allocation plan that we came up with last year, we felt was a prudent long term orientated plan that satisfies both the rebuilding of the fleet as well as replenishing some capital back to shareholders in the meantime. Thanks, John.

Operator

We'll go next to Omar Nakhta with Jefferies. Your line is open. Please go ahead.

Speaker 1

Thank you. Hey, guys. Yes, I just wanted to follow-up maybe on John's question. I know it's something that we kind of constantly comes up, but clearly now you're in the net cash position, completely debt free. So congrats obviously on that.

Speaker 1

It's been a long time coming. But, I did notice, you've accounted for free ships as available for sale as of the end of the quarter. So, it looks like you're going to continue to scale as we're just talking about. Kevin, you have 42 tankers in the fleet. After those 2, there's going to be 40.

Speaker 1

You mentioned looking replace ships as you sell them. I guess, kind of just thinking about that, if we think about the fleet by today, say, post those sales, we'll have 40 vessels. Is there a certain critical mass or certain number that you're comfortable wanting to stay above in order to continue to achieve these types of rates? And should we expect sort of like

Speaker 2

a sooner replacement of vessels

Speaker 1

versus what we've seen here over the past few years?

Speaker 2

No, I think, obviously, scale provides us a lot of optionality to in different markets and be able to be in different places as the volatility that is inherent in strong markets plays out. And we want to have enough scarcity over the pie across several markets. So as we look at some of the dealerships that we sold at the end of last year, we do currently hold a Suezmax and Aframax for sale, looking just to take value off the table for that old book class of ship. If there is an opportunity to find a newer, more modern vessel, yes, we would redeploy that capital to keep these closure on. But we're not looking at a set number or anything of that nature.

Speaker 2

It's more around being able to distribute a large enough fleet across several markets to make sure that we can capitalize on the volatility that we expect to continue to see. So that's really how we think about it, Omar.

Speaker 1

Okay. And how does TCN play into that? Clearly, several

Speaker 3

quarters ago, you brought in a

Speaker 1

good chunk of ships to take advantage and have that cost closure that's stabilized and that food hasn't really grown. Is that an option or is it you prefer to do it via ownership?

Speaker 2

No. We have a lot of options. We've got a lot of tools in the toolkit. You can I mean, at the Game Charter book, we got in early before the market really flipped off? And we've really enjoyed the added profit that that fleet's now back to provide.

Speaker 2

But we're at a point in the market where there is a bid ask spread and it's rather large at the moment between what other owners want for their ships and what we're willing to pay. So you have seen a slowdown. That is a natural effect of the market reaching the sort of levels that we're seeing. So that doesn't preclude us from adding additional ships. It's just finding the right ship at the right price, often in the right location, which has a massive impact on your overall earnings.

Speaker 2

We have several ships that will be coming off later as their charters roll off. And we've already started discussions with the owners to see if we can find a number that's equitable to both sides to keep those ships on. So it's definitely a toolkit or a tool that we've got in the toolkit that we expect and are always looking to try and utilize. Similarly, I've been asked on previous calls as to whether we'd lock in our own ships at these kind of levels and put them up. And the answer is the same there.

Speaker 2

If we can find the right opportunity that pays the right price, we'll certainly execute on it and be able to report on it.

Speaker 1

Got it. Thank you for that, Kevin. And maybe just one more for me. Regarding TMX, you've been highlighting that the past couple of quarters that we're getting closer and closer to that having an impact. You mentioned the different potential trade lanes and reverse sliding and whatnot.

Speaker 1

Maybe are

Speaker 3

you able to give us

Speaker 1

maybe some perspective on how you think about that market developing? You highlighted how it's somewhat of a remote location relative to the normal trade lanes that Aframax will traffic in. How do you think the spot market develops in cargoes there in terms of kind of maybe pricing ships to stay there since it's kind of an isolated area, at least relative to other areas. So I guess maybe how does the spot market play out there? And I know that's kind of trying to give some sort of crystal ball approach.

Speaker 1

But if not able to do that, maybe just in terms of what you're seeing now in terms of what the rates offered in that region are versus where they are globally on average. Any kind of color you can give on pricing in that region?

Speaker 2

Well, first, I think we've got to be honest, as we laid out in our presentation, it's early days yet. The cargoes are starting to come. We've seen a couple of fixtures in the market. From a positive standpoint for us, they seem to be long haul, both to China and then down to 15 days down to Panama. So where the cargoes go at this point, we don't know.

Speaker 2

We have to wait and see. We think that there's 4 main options that the customers will take. A lot will depend on oil pricing and the differences between oil prices in different regions, which again, I'm not going to stand here and in any way trying to do that. What I do think will happen though is the oil will have to move and it will be priced into the right market and that will include shipping cost. And if that means that ships in the Far East have an option as they come into North Asia for discharge.

Speaker 2

They now have an option to look for the Togalas across to Vancouver pick up a nice long haul voyage from there. Similarly, ships that do end up trading into the West Coast or through Panama, they now have that option to go up. So I think it's something that owners will have to wait and see as the trades develop. I don't think necessarily it will mean that you will have ships that will place themselves there. I think they will move in from other regions as and when the requirements pick up.

Speaker 2

And from a freight standpoint, it will be priced according the earnings that the owners expect versus relative to what they can do in other markets. But I think the real benefit we're going to see is the additional ton miles specific to the Aframaxes because the Aframax is the largest ship you can move into Vancouver. You can put in a smaller Panamax, but stem sizes are too big for Panamax. And you don't have a lot of storage up in Vancouver. So the Aframax really is the vessel that this port needs to use.

Speaker 2

And I think whether it does go to the West Coast or to lighter age or Panama or to Asia, Gaffromax is going to be the ship that's going to have to service that. And it's going to cause dislocations. It's going to pull ships from the U. S. Gulf.

Speaker 2

It's going to pull ships from Asia. And that's going to benefit possibly Suezmaxes and other Aframaxes in those regions as the supply diminishes?

Speaker 1

Jeff, it will be very interesting to see how it's starting to develop here in the next few months. Well, thanks, Kevin. I really appreciate the perspective.

Speaker 2

No worries. Thanks.

Operator

We'll move next to Ken Hoexter with Bank of America. Your line is open. Please go ahead.

Speaker 4

Hey, good morning. Kevin, I guess just to follow on that thought process, right, if we get those moving down into California, I guess then you'll still have product that needs to move and longer haul that replaces that, right, the product that California would have been holding, you'd make up with even longer hauls?

Speaker 2

Yes. I think you'll at the moment, you could see Canadian crude backing out some of the long haul Arab barrels, which will they'll be placed on barrels and they'll have to go somewhere else. So that's what's really exciting about this development. It's going to impact primarily and initially the Aframaxes, but it could have knock on effect into other areas as well, which is going to be interesting to see how it develops and to react to that.

Speaker 4

So, to follow-up, thanks for that, Ken. So, I guess, Christian talked about rates earlier, to Tom's question, but as far as seem to be getting hit, I guess, relative to your quarter to date rates that are booked right, going from $48 to $44 a day, while Suezmax is a flatter at 3.7 to 45. Is the market not anticipating or adjusting for that plasma patch tightening yet or is it too early to react to TMX?

Speaker 2

I wouldn't read into such a small differentiation on the rate, especially at rates in the mid-40s. We haven't seen these rates in 20 years. So I think it's a function of the elasticity of the fleet moving up and down. And I think

Speaker 3

the U.

Speaker 2

S. Gulf market is probably one of the most volatile. You can have rates probably to $30,000 a day and within a week's time, it could be back up at $65,000 So I think we've got to look at or if we are trying to look at what patterns develop, I think we've got to look at it over a much longer period. It's not I wouldn't read into it too much in the short term. And I think The market can't the market isn't going to front run the rates in anticipation of the cargoes.

Speaker 2

We have to wait until the PMX volumes come in, and they come in at the levels that the pipeline owners have indicated. And when we see the volume, that's when I think you'll start to see the impact on the offers.

Speaker 4

Gradually, right? Even though it's not all just once you open up in the end of May as you keep those volumes coming online through the year. So you have discussions on charter in rates or even your thoughts on charter out, purchase price of new vessels. And Kevin talked about or unsuccessfully talked about the fleet renewal process. What are your thoughts on entering that low order book or are rates just only economical given where I mean, I guess, if you're talking mid-40s, when does it become economical?

Speaker 3

Yes. It's

Speaker 2

certainly an interesting challenge to think through because we have to acknowledge that both secondhand pricing and newbuild pricing is high. As you said, so is rates. So I think all I can speak to our thoughts on that, Ken, is that as of today, we haven't ordered any new ships at these pricing levels. And if we are going to do anything, I think you'd probably see us chipping away at the secondhand market first just to replenish the lost spot exposure from the sale of the 2 ships that we had in December January. And if we do sell 2 more, you'll probably see us in the secondhand market trying to replace those because you really, if you're paying these kind of prices, you want to have those ships earning from day 1.

Speaker 2

And you want them earning $40,000, $45,000 a day like we are today. So it would be more prompt purchasing than looking towards more of the longer term replenishment.

Operator

And with no other questions holding, I would like to turn the conference back to the company for any additional or closing comments.

Speaker 2

Thank you for joining us, and we'll speak to you next quarter.

Operator

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.

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