Q3 2020 Teekay Tankers Ltd Earnings Call
Welcome to Teekay tankers, Ltds third quarter 2014 earnings results Conference call.
During the call all participants will be in a listen only mode. Afterwards, you'll be invited to participate in a question and answer session at that time. If you have a question participants will be asked to press star One to register for a question for assistance during the call. Please press Star Zero on your Touchtone phone as reminder, this call is being recorded.
No.
Now for opening remarks and introductions.
Now I'd like to turn the call over to the company. Please go ahead.
Sure Kevin begins I'd like to direct all participants to our website at www Dot Teekay tankers dot com, where you'll find a copy of the third quarter 2020 earnings presentation, Kevin Hester overview. This presentation.
During today's conference call. Please.
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 third quarter and 2020 earnings release.
And earnings presentation available on our website.
I'll now turn the call over to Kevin Mci, and Teekay tankers, president and CEO to begin.
Okay.
[noise] Caesar and Hello, everyone. Thank you very much for joining us today for Teekay tankers third quarter 2020 earnings conference call.
And I Hope you and your families are all safe and healthy.
Joining me on the call today are secure and dry they teekay tankers CFO.
Christian Waldegrave Directors research.
Moving to our recent highlights on slide three of the presentation.
Teekay tankers generated total adjusted EBITDA of approximately 40.
$6 million during the third quarter, an increase of $18 million same for your period of the prior year.
We reported adjusted net income of approximately $3 million.
Or nine cents per share.
In the third quarter up from an adjusted net loss of $21 million or a loss of 63 cents.
Per share in the third quarter of 2019.
Our improved results are largely due to higher revenues several lucrative fixed rate charters secured during periods of market stress.
Great substantially higher than the third quarter sports rights.
We have continued to build financial strength this quarter generating.
Free cash flow from operations of $31 million.
Net debt has been reduced by nearly $50 million to $502 million and we continue to have a strong liquidity position.
Which was $470 million at the end of the quarter.
Our net debt to total capitalization.
Thanks declined to approximately 30% at the end of September compared to 32% last quarter and 52% year ago.
As Mike mentioned in the earnings call in August the company finalized a three year $67 million term loan at an attractive rate to refinance the debt.
Conciliatory secured by four Suezmaxes had been scheduled to mature in 2021.
With the completion of this financing.
Refinancing the company does not have any debt maturities until 2023.
Lastly, as highlighted at our Investor day in November of 2000.
This team and in recent quarters, one of our 2020 strategic priorities is to reduce our cost of capital.
I'm pleased to report that in October we repurchased two aframax vessels previously under sale leasebacks for $29.6 million, reducing our exposure to this relatively higher.
Cost debt capital.
The vessels were acquired using existing liquidity and are now unencumbered.
In the freight market third quarter crude tanker spot rates decreased compared to the first half of this year, primarily due to knock on effects of COVID-19, which I will touch on in more detail. The next.
Clay.
We were able to significantly mitigate the impact of these weaker rates by securing fixed rate charters from a number of our vessels during the periods of market stress, which enabled us to have 22% of our fleet on fixed rate charters in the third quarter at an average rate of $37600 per day well.
Well above the prevailing spot market rates.
Turning to slide four we looked at recent developments in the spot tanker market.
As mentioned spot tanker rates declined during the third quarter of 2020 due to the continued impact.
When oil demand from the COVID-19 pandemic.
Global oil inventories.
Built rapidly during the first half of the year due to the large mismatch between supply and demand leading to a sharp correction in bus crude oil prices and refining margins.
In response, OPEC and its partners slashed production by a record 9.7 million barrels per day in May.
Although they have.
Returned 2 million barrels per day of production in August global oil supply remains well below pre pandemic levels and this has been negative for tanker trade.
Refinery runs have also been significantly cuts as refiners respond to weak margins and this is further dampen demand for crude and hence crude transportation.
Jason.
At the same time some of the ships that were placed into floating storage earlier in the year have returned to the fleet, adding to the supply demand imbalance.
Although teekay tankers saw a drop in earnings compared to the first half of the year, our third quarter results were higher year on year as shown by the chart.
On the left of the slide.
This was particularly true for our Suezmaxes, where rates were further bolstered by the fixed rate time charters that we entered into.
During late 2019 in the first half of 2020 at rates much higher than current spot market.
The chart on the right of the slide shows the extent.
Sten three spot rates have fallen in recent months.
Looking ahead to the winter we are currently facing a challenging rate environment due to the fundamental headwinds I described earlier.
However, you could see some support for mid size tankers future turn of Libyan crude oil exports, which have risen to around 1 million barrels per.
Having averaged only around 100000 barrels per day last quarter.
Living crude is predominantly moved on Aframaxes and Suezmaxes. So the return of exports could provide some support to rates in the Mediterranean.
Furthermore, we expect normal winter seasonality.
That provide additional support later in Q4 in the form of when winter heating demand and an increase in vessel delays due to bad weather.
On the flip side to reserve agents and Corona virus cases, and fresh look sense, particularly in Europe may weigh on demand.
On the whole, we anticipate that the typical.
Ago winter market strengths will be moderated compared to prior years.
Turning to slide five we give a summary of our fixtures in the fourth quarter of 2020 to date.
Based on approximately 49% and 45% spot revenue days booked teekay tankers fourth quarter.
To date, Suezmax and Aframax bookings have.
Average approximately 10000 $107700 per day, respectively.
For our L.R., two fleet, which are predominately trading dirty based on approximately 44% spot revenue days booked fourth quarter to date bookings have averaged approximately $8500.
As per day.
Teekay tankers has been proactive in managing its fleet by locking in attractive fixed rate charters during periods of significant strength in the tanker market over the last few quarters as a result, the company's combined rates for fixed and spot fleet.
So far in Q4.
Been significantly higher than current spot market rates.
Our Suezmax fleet, 62% of its Q4 revenue days booked a $24200 today.
Our Aframax fleet was 54% booked $12400 per day, and our L.R. two fleet was 52% booked as 13000.
And $500 per day for the fourth quarter of 2020.
For further details on our fixed rate charters. Please.
Please refer to the appendix.
Presentation.
Turning to slide six.
We turn to the outlook for the tanker demand over the next 12 months.
Global oil demand has recovered sharply from the low point in Q2.
Demand remains several million barrels per day below pre pandemic levels.
We expect demand will grow through the course of 2021, particularly during the second half of the year and this will help bring oil inventories back to more normal levels.
As shown by the chart on the slide the oil market moved into a deficit during the third quarter.
Don't Droser expenses to continue for the remainder of 2020 and in 2021.
However, depending on the speed of the demand recovery. It maintained majority of next year to fully reverse the large build of inventories.
Placement first half 2000 trends.
As demand recovers and oil inventories are drawn down we expect an improvement in refining margins, which will lead to a recovery in refinery throughput.
This will create additional crude demand and give support to crude oil prices.
Should then lead to higher Opex.
System, both OPEC and non OPEC sources.
As this happens tanker demand is expect to recover and give support to freight rates.
The exact timing of this recovery, however is uncertain and will depend to a large extent on how the corona virus pandemic involves next year.
We remain hopeful that occur.
Excellent virus vaccine will become widely available during 2021.
And that this will accelerate our return to more normal demand patterns in transportation and travel sectors, leading to higher oil and tanker demand.
Turning to slide seven we look at the positive seat supply fundamentals.
The outlook for fleet supply continues to be very positive due to significant new reduced level of newbuild ordering diminished tanker order book and the potential for higher scrapping future and aging tanker fleet.
As of October 2000 as of October 2020 tanker order book totaled 47.
Million deadweight tons or just over 7% of the existing global fleet.
When measured as a proportion of the total fleet is the lowest tanker order book seen in over 24 years.
Tanker scrapping has been very low over the past two years and this has resulted in a buildup of older Vess.
Hills, which faced removal in the near future.
As shown by the chart tanker fleet currently has an average age of almost 11 years, which is.
17 year high.
The potential period of weaker rates in the coming months combined with ballast water treatment system installations, and dry dock costs could encourage higher.
Scrapping in 2021.
Who helped to limit overall fleet grows.
Finally, you tanker ordering remains very low.
Due to a more restrictive financial landscape and uncertainty as to what type of Belsen system to order given upcoming environmental regulations.
Around 12.5.
1 million deadweight tons has been ordered so far this year versus an average annual order rate of around 34 million deadweight tons over the past 20 years.
We believe newbuild ordering will remain relatively low in the near future and this will help keep the order book at or near historic lows.
When taken together the combination of low ordering small and shrinking order book and the potential for higher scrapping should help keep fleet growth low over the next two to three years.
This will help facilitate tanker market recovery once the demand side normalizes.
Ill now.
Turning the call over to Stuart to cover the financial slide.
Thanks, Kevin turning to slide eight over the past year Teekay tankers has transformed its balance sheet, which provides us with financial strength to be resilient in any tanker market.
Over the last 12 months Teekay tankers has generated over 400 million.
$1 of free cash flows from operations and completed over $100 million of asset sales, creating a resilient financial platform for the company.
This strong free cash flow has had an enormous impact on our overall financial position decreasing our net debt by nearly $500 million or 50% to 500.
And $2 million, while improving the company's liquidity position by $375 million to a total of $470 million at the end of September.
We currently have 13% of ship days on fixed rate charters for the next 12 months at an average rate of $33500 per day, which is well above the current spot market.
Our fixed rate charters combined with our our almost $500 million of debt reduction and the unwinding of our sale leasebacks has resulted in a low free cash flow breakeven for our spot fleet of approximately $13500 per day through the end of Q3 Twentytwenty one.
As Kevin mentioned.
In his opening remarks, we closed the refinancing of our 2021 debt maturity in August and now have no debt maturities until 2023.
We have taken steps to reduce our cost of capital by starting to unwind our sale leasebacks with the acquisition of two vessels previously under sale leasebacks in October.
In addition, we into.
Tend to declare to more sale leaseback purchase options later this month, which will further reduce our cost of capital when the vessels were acquired in May 2021.
Over the past year, we have reduced our quarterly net interest expense by $4 million or 26%.
Lastly, as shown at the bottom of the slide having pre paid a significant amount.
Amount of debt in 2020, our debt repayment profile is very manageable in the coming years.
With our efforts to de lever and reduced our cost of capital along with a manageable debt repayment profile, we have positioned ourselves financially to weather potential market headwinds with that I will turn the call over to Kevin to conclude.
Thanks.
In closing I would like to say thank you again this quarter to all of our seafarers and shore based staff for their continued extraordinary efforts in bringing energy in the world with Teekay spirit during the COVID-19 pandemic.
Im extremely proud of our team for continuing to execute despite.
The unprecedented global challenges.
Operationally, we continue to focus on safety and well being of our seafarers all the while continuing to deliver TJ is high quality of service to our customers.
Commercially the impact of the weakness in spot market has been mitigated by our well time fixed rate charter.
Yes.
Financially, we have transformed our balance sheet over the last 12 months and have built a resilient financial position.
The strong financial foundation, a low free cash flow breakeven and our mid size fleet profile, we believe that Teekay tankers is well positioned to continue to create.
Our holder value even in these unprecedented and uncertain times.
With that operator, we are now available to take questions.
Thank you Sir at this time, we'll open the floor for questions. If youd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using the space.
Sure Tom Please make sure your mute function is turned off to allow your signal to reach our equipment.
Can press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question. This comes from Jon Chapelle with Evercore. Your line is open. Please go ahead.
Thank you good morning, guys.
Stuart if I can start with you you mentioned two more leases that you hope to have done by the fourth quarter and can you give us the magnitude of those leases and then also just to continue on that theme.
What's the timeline look like into 2021.
When you have the opportunity to maybe to pursue the for the removal of those higher cost of capital pieces of paper.
Hi, John Yes. So the then the two that we intend to exercise later this month or total lease balance of about $58 million.
And those.
Would declare those in November, but we would actually acquire them and made just in terms of timing. So it's about 50 $758 million and the the rate on those is about 9% so quite significant savings from from from buying those back and then moving into 2021.
By the end of 2021 actually all the remaining 14 leases.
Our available to us through purchase options.
The various leases have different terms some of them have specific dates during the year. When we can exercise and others are a little more flexible in terms of exercising when we'd like but by the end of the year. The remaining all of the remaining $367 million are available.
The average.
Average the average financing cost across all of those is about 7.5% roughly so there is quite a quite substantial opportunity for savings.
Great and then that kind of leads to my second question for both the steward and Kevin.
You guys are in New York, almost a year ago to the day laying out.
Plan for 2020, and certainly this year hasn't turned out like anyone would have expected, but as far as you executing your plan. It's gone up probably better than you would have you hoped what's kind of the next steps now for the next 12 months is to continue to pay down those leases continue to bring the leverage down even further raise more liquidity.
If the do you think that now we're in this period, although uncertain where things are about as buyers. They can be it now you shipped a little bit more to offense on how do you think about the path to November 2021.
Yes.
And John.
To close out this.
I didn't really we are sticking to plan.
As as you said in a very different user you anticipated coming into it when we spoke to to everyone in in November last year, but.
But I think we've been very successful in executing along the lines that we wanted to and as a result.
I think we can that we can look forward.
From a from a position of strength.
However, I think as we've mentioned in our remarks 2021 isn't uncertain year, we're not clear on the timing of the recovery.
Fundamentals are there and then on the fleet supplies.
Okay.
Demand and the potential resurgence for.
Sure Covitz.
Does leave question marks so as we look to go into next year I think.
Sit down with our board at the end of the year, we'll assess what we've managed to achieve this year.
Nothing.
So I am looking forward to a robust discussion with them about what.
Sort of plants, we layout for each one.
At this point in time, we have.
And that conversation yet so.
Come back to the market, we have further clarity and direction.
But should we given the.
Certainly we should assume that we should assume until that point then it's just continue to de lever number one priority.
Yes, I think as Stuart mentioned, we've got some upcoming sale lease backs.
We'd like to eliminate and get rid of the higher cost of debt so until that is finalized.
Shouldn't differ from what we're doing now will come back to the market.
Okay.
Thank you Kevin Thanks Stuart.
Thanks, John.
Our next question comes from Randy Gibbons with Jefferies. Your line is open. Please go ahead.
Hi, gentlemen.
Sounds good.
Yeah, well thanks good thanks.
Well I'm looking at your kind of operating leverage might are you content with your current fleet or looking at possibly expanding it further following your debt repayments that you are kind of just alluded to and when it comes to that expanse.
And would it be by acquiring second hand vessels or maybe additional time charter ends.
Yeah. Good question, Randy I think first and foremost, we're we're very comfortable with.
Our fleet profile, both with it its scale.
And its makeup.
I think in terms of where we go from here.
Given where the market is given the uncertainty I don't think you'll see us do anything in terms of.
Further fleet building or anything of that nature I think we've got the scale we like.
Okay.
We have sold some of the older assets earlier in the year.
So I think we are where we stand now is more of a wait and see.
Let's figure out where this this market is going where the.
Recovery comes into play.
Take.
Whereas the.
Sale leaseback opportunities that we have to.
Lower our cost of capital.
In terms of Newbuildings newbuild prices have come off.
It's something that we monitor as we do with that second hand sale and purchase market.
And over time.
And those are decisions that we weigh up and compare and contrast, what is the expected long term return for either new builds or secondhand and to be honest with you we're agnostic as to why.
Which one we would go after at the appropriate time.
It's based on which.
We.
Which.
Which passive growth provides the best value to shareholders and that varies during various points in a cycle. So I.
I think for now where we're not active we're not looking to add water ships, it's more wait and see how things play out.
Okay.
I guess following that your balance sheet liquidity, clearly rapidly improving evidenced on slide eight there.
Now one thing that has been removed from slide eight and also the appendix is your NAV calculation, which was I think $28 a share at the end of Twoq you.
So with that what did you.
Our current NAV today, and how have second hand, aframax and Suezmax asset values fared here in recent months.
So we haven't actually run the NAV recently like since probably the last since last quarter. So I don't have an accurate NAV to provide but I do know that asked.
Asset value certainly have been under pressure.
If you look at based on Clarksons, probably over the last quarter.
Depending on the age of assets, they're probably down between five and 10%. So there they have been under pressure of course, there is a lack of liquidity in the market. So there's not a lot of transactions, which always makes it difficult to really know.
What the values are but but.
But I guess as a rough guide probably down 5% to 10% in the last quarter and that would that would translate as expected into into our NAV, but I don't have an exact number for you.
Got it all right so maybe mid.
Mid to low twentys at worst sounds like.
I think that's the right I think that's the right ballpark certainly.
Well well above 10 43 so.
Well that's it for me thank you.
Okay.
Thanks Ryan.
Our next question comes from Ken Hoexter with Bank of America. Your line is open. Please go ahead.
[noise].
Hey, good afternoon.
Kevin maybe just talk a bit about where your thoughts on where storage is now the impact you're seeing from from cobot to those spot rates I guess ultimately just to wrap it up.
When do you typically see the seasonal pickup is it is it not until Thanksgiving and you mentioned kind of a delay in that.
Maybe just to expand on your thoughts on on your your thoughts on rates.
Sure Ken.
Regarding the first part of your question on floating storage.
It is interesting on the crude side of the ledger.
It's really a.
The tale of two.
Two different.
Sort of stories, one vlccs and interestingly they have.
Maintain a fairly steady level of.
Okay vessels in that.
In that play.
The peak of the market.
Yes.
At about 84, Vlccs and I think as of last week. There were some 87, so it's dropped a little bit.
Summer then picked up again so.
On the V side of the Ledger is I would say it's fairly steady.
Where we have seen the declines is beyond the suezmaxes now from.
From axis.
And as a relative comparison you had.
Over 80, Aframaxes that were in storage at the peak in May.
I think Matt the latest figures down sort of in the low Twentys 23, 24 at last count.
Simply suezmaxes were down about.
About.
60% from where we were at the peak so let.
The mid sized spaces, given that the cost per barrel storage on those is obviously higher than that of the LCC. Those are the first the classes of ships that you'd see seem unwind.
And Thats why I think you've seen.
Midsize rates on Suezmax.
Texas.
Come off.
Earlier than what we saw the Vlccs come off.
In terms of the typical pickup in seasonality.
A lot of it will depend on weather and we've had Q fours or picked up earlier than now.
Now.
But typically you run into.
When you start getting delays in places like the Bosphorus Canal, you start getting the fog rolling in and out of the us Gulf that tends to come off the works logistics.
Especially on the Aframax Brosnan Suezmaxes.
And that sort of eats into to supply and.
At least puts a floor if not bolsters.
The the supply dynamic, which we're hoping to get some off during this winter months, but.
But so far it's been relatively benign.
I think the hurricane season has has extend longer than.
[music].
We've seen in recent years, so perhaps the folks season in the US Gulf War will be a little bit delayed this year, we'll have to wait and see.
Thanks for that.
And any thoughts on.
Moving any deal or two to the clean burst sturdy TV the product market is having.
Better fundamental outlook or forward or not.
We are actually in a in the process of moving one of our LR twos that is coming out of dry docks, we're going to lose that she has been trading dirty and we're going to move for into.
Clinton agents.
In markets.
And we're doing that really because the costs.
It is absolutely minimal given the fact, she is coming out of dry dock, so seeing where the markets are it's it's unclear which won the crude versus clean is going there.
Increase first so given the fact that it was going to cost us anything to do.
The changeover, we decided to shift some of our extra crude basket.
Starting with this one ship so it's something that we monitor daily.
Obviously, the pandemic resurgence in Europe.
May drive some short term storage and felt that that might comment.
Into play over the very near term.
At the moment is just the one ships that were.
We're moving over and if we do do future ones that would be on the.
The most efficient and cost efficient way that we could possibly do it rather.
Rather than.
Just to spend a lot of money to changeover was no certain perspective.
Demand pick up.
And I know, it's really early for my last one but obvious.
Obviously, new I guess discussion of rules on high mode 2030 and beyond.
Any early read on on kind of.
The ability to to adapt to those.
Proposed targets and thoughts on costs or is it just too early days.
Okay.
Yes, absolutely right. It is very early days, but we have had a history of.
Upgrading our fleet and.
Putting in capital into our fleet to.
To make them more efficient a.
Very successful program around our whole coatings, which is say 2% to 3% of.
With our fuel Bill.
Over the last several years.
And whether it's fitting these ducs or propeller boss cap funds are various.
Technical.
Grades that we do to our ships when they go into dry docks.
We've made some some serious inroads into reducing our carbon footprint already.
And that's something that we'll continue to do.
Great. Thanks for the time.
Thanks, Ken.
This marks the end of the question and answer session I will now like to turn the call back over to the company for any closing remarks.
Thank you for joining us today and please keep yourselves and your family safe during these difficult.
And.
Dangerous times speaking next quarter. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].