Q1 2021 Teekay Tankers Ltd Earnings Call
Welcome to Teekay tankers, Ltd's first quarter 2021 earnings results conference call.
During the call all participants will be in a listen only mode.
The words, you will be invited to participate in a question answer session.
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As a reminder, this call is being recorded for opening remarks, and introductions I will turn the call over to the company. Please go ahead.
Before we begin I would like to direct all participants to our website at www Dot Teekay tankers Dot com, where you will find a copy of the first quarter 2021 earnings presentation, Kevin and I 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 first quarter 2021 earnings release and earnings presentation available on our website I will now turn the call over to Kevin Mackay, Teekay tankers, President and CEO.
Begin.
Thank you Stuart Hello.
Hello, everyone. Thank you very much for joining us today for Teekay tankers first quarter 2021 earnings conference call.
I Hope you and your families are all safe and healthy.
Joining me today on the call are Stewart Andrade Teekay tankers CFO.
And Christian Waldegrave director of research for Teekay tankers.
Moving to our recent highlights on slide three of the presentation Teekay.
Hey, tankers generated total adjusted EBITDA of approximately $16 million during the first quarter, an increase of $6 million from the fourth quarter of 2020.
We reported a total adjusted net loss of approximately $22 million or 65 cents per share during the first quarter an improvement from an adjusted net loss of $41 million or $1 21 per share in the fourth quarter of last year.
Our improved results were largely due to higher spot tanker rates during the quarter.
And supported by revenues from several lucrative fixed rate charters secured during periods of market strength.
Rates substantially higher than the first quarter spot rates.
Despite a challenging quarter, we have maintained our strong balance sheet with liquidity of $372 million and a net debt to capitalization was 32% at the end of the first quarter of 2021.
Our strong financial position has enabled us to continue reducing our overall cost of capital on an opportunistic basis.
In March we declared additional purchase options on six vessels currently on sale leasebacks, bringing our total of such purchase options exercised since November 2028 vessels with the transaction is expected to close in May and September.
Lastly, while improved relative to last quarter, the tanker market weakness continued into the first quarter due to lower oil demand as a result, as the ongoing impact of the COVID-19 pandemic.
However, mid sized tanker rates did see a spike in March.
As a result of bad weather and the Suez Canal blockage.
Looking ahead, although we expect near term headwinds with continued impact of COVID-19, we are seeing early positive signals indicate a market rebound starting in the second half of 2021, which I will touch on in more detail later in the presentation.
Turning to slide four we look at recent developments in the spot tanker market.
Spot tanker rates remained generally weak during the first quarter as COVID-19 continues to have a negative impact on tanker demand.
Global oil demand fell by around 1 million barrels per day in Q1 due to a resurgence in COVID-19 cases over the winter months in several countries.
OPEC continues to limit oil production during the first quarter, Saudi Arabia, implementing an additional voluntary supply cut of one.
<unk> barrels per day from February in response to weaker oil demand.
Finally, the first quarter saw a further $4 5 million deadweight tons of tankers returned to the trading fleet from floating storage, adding two available fleet supply and worsening the supply demand imbalance.
Well overall, the first quarter was a weak quarter in terms of spot rates. We did see some rate spikes during the month of March as shown by the chart on the right.
Most notably Aframax rates reached $20000 per day on some trade routes.
These spikes were driven by bad weather in the U S Gulf Mediterranean and the blockage in the Suez Canal towards the end of the month, both of which caused disruption and boosted rates for a short period of time.
Although these temporary disruptions from now and it's in rates have reduced start with Q2.
It is encouraging to see a positive rate reactions to these factors and what was otherwise a depressed quarter for rates.
It is perhaps a sign that the worst of the market may now be behind us.
Although spot tanker rates were weak during Q1, TNK managed to mitigate the impact through its fixed rate time charters as shown by the chart on the left.
This is particularly true for our Suezmax fleet, where our fixed rate charters lifted overall suezmax earnings to around $16800 per day versus spot earnings of around 10000 and $700 per day.
Turning to slide five we provide a summary of our spot rates in the second quarter to date.
Based on approximately 50, 55% and 49% of spot revenue days booked teekay tankers second quarter to date, Suezmax and Aframax bookings have both averaged approximately $10500 per day.
For L. R. Two fleet, which are predominantly trading dirty based on approximately 49% spot revenue days booked second quarter to date bookings have averaged approximately $11900 per day.
Turning to slide six we look at some of the key indicators, which we believe point towards a future tanker market recovery.
First we acknowledge that there is still uncertainty in the near term due to the ongoing COVID-19 pandemic.
It has potential to further disrupt oil demand as new outbreaks occur.
This has been highlighted recently, but it's devastating outbreak in India advising case numbers in several other countries.
Well first and foremost a human tragedy. The increase in cases also has the potential to lower oil demand and possibly oil imports to the detriment in spot tanker rates.
However, if we look further ahead through the remainder of 2021 and beyond there are a number of reasons for optimism.
Several of the key indicators that we track have improved since the start of the year.
Firstly, the global economic outlook is improving with the IMF recently, increasing their forecasts for global GDP growth in 2021 from five 5% to 6%.
As a result of this revised outlook. The IEA have increased its forecast for global oil demand in the second half of the year.
0.3 million barrels per day to $98 9 million barrels per day.
More importantly from the crude tanker market the IEA expects crude throughput at refineries increased by $6 6 million barrels per day between April and August of this year, we should create significant crude tanker demand.
Oil inventories, which increased significantly in the second half of 2020 have been drawn down significantly due to the production cuts was the OPEC plus group of oil producers and are now almost back to the five year average.
The combination of normalized inventory levels and rising oil demand as we move through the second half of 2021 should result in more oil production.
With OPEC plus indicating their intention.
To return to supply of $2 1 million barrels per day between May and August.
In order to meet rising demand, we believe that further such increases will be necessary.
Is this additional production that really should help rebalance tanker supply with demand increasing fleet utilization and helping to kickstart a tanker market recovery.
The fleet supply side continues to look very positive with the order book as a percentage of the fleet currently at approximately 8%.
Very close to historic lows and well below the long term average of around 20%.
Rising newbuild prices spurred by an increase in steel price in a very large amount of ordering in the containership sector. Since the start of the year are acting as a deterrent to tanker new building orders.
We've also seen a modest increase in recycling numbers since the start of the year that we would look for a more substantial increase in demolitions, if or more lightly when sanctions on Iran are lifted and the fleet of older ships currently serving sanction trades are phased out.
Overall market conditions indicate very low levels of fleet growth for the next two to three years, which should help facilitate a tanker market recovery once demand starts to normalize and improve.
In summary, it appears that we may be past the worst of the tanker market downturn and although the next few months still appear challenging due to the uncertainties of COVID-19, we are increasingly positive on the longer term fundamentals, which we believe will underpin the tanker market recovery.
This belief is already being reflected by the wider market through higher time charter rates and asset values. The secondhand aframax volumes, increasing by up to 20% since the beginning of the year.
I'll now turn the call to Stewart to cover.
The financial slide.
Thanks, Kevin turning to slide seven we highlight the company's strong financial position as Kevin mentioned in his opening remarks, we have maintained our strong balance sheet, which provides us with the financial with financial strength and flexibility, we have a liquidity position of $372 million and a net debt to capitalization of 32.
At the end of the quarter one of our strategic priorities is to reduce our cost of capital in March we exercised purchase options for an additional six vessels for $129 million in total we have exercised purchase options on eight vessels that are currently on high cost sale leaseback financings for approximately 186 million.
Two of which closed in may with the remaining vessels closing in September. We are currently in the process of negotiating term sheets to refinance these eight vessels with lower cost of sale leaseback financings.
Lastly, having reduced a significant amount of debt in 2020, our debt repayment profile is very manageable in the coming years with no significant debt maturities until 2024 with that I will turn the call over to Kevin to conclude.
Thanks Stuart.
I would like to say thank you once again this quarter to all of our seafarers and shore based staff for their continued dedication to providing safe and uninterrupted service to our customers. During these challenging times.
As we hopefully move closer to a more normalized world at Teekay. We will continue to focus every day on the safety and wellbeing of our seafarers as we have done since our inception, nearly 50 years ago.
Finally, with a strong financial position and high operating leverage we believe that Teekay tankers is well positioned to weather the current market challenges and benefit from anticipated tanker market recovery.
With that operator, we are now available to take questions.
Thank you.
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Press Star one for a question, we'll now pause for just one moment.
Moving out we will take our first question from Jon Chappell from Evercore. Please go ahead.
Thank you good morning, or good afternoon wherever you are.
They don't do it first question first question for you I don't know what 86 of the leases that you were able to negotiate you said that you're using cash and news sale leasebacks to pay those off I understand the term sheets are still.
In process right now but.
Roughly how much of new debt do you foresee, replacing about 186 versus scrubbed liquidity that you have today.
Hi, John Yeah, we're actually just finalizing those term sheets. So we've got a pretty good handle on that.
The 186 weeks, we will be refinancing $140 million with the new lower cost sale leasebacks and using.
About $45 million of existing liquidity liquidity for the remainder.
Okay. That's helpful and then the well I know once again you negotiate the terms, but just roughly speaking because when you see a sale leaseback being replaced with the sale leaseback immediately by mine goes to why don't you just use your existing undrawn.
<unk> because sale leasebacks are still higher cost of debt is there a rough estimate of what the spread.
Spread benefit will be so to speak so you know that the amount of basis points, you'll save from the new facilities versus the average of the one of the eight that you'll be replacing.
Yes.
So.
On the.
And then the portion of our pulling from our revolver, obviously theres substantial savings.
On the spread from the $140 million spread is about 5%.
If we fix that out and actually larger than that if we allow it to flow for now so it's actually very substantial savings.
We're probably looking at.
A minimum of $8 million in 2022 and interest savings from doing that.
Okay, that's huge.
And then finally Stuart the is just refresh my memory again, I think I ask this every quarter, but after these eight.
I believe you still have some sale leasebacks from from a prior time with this with the high level of interest rates, what's the timing on potential exploration lower renegotiation for the remainder of those.
Yes, so we still have six vessels. After after these ones redeliver will have six vessels on sale leaseback arrangements that we had done a few years ago. The interest rate on those is quite a bit lower its more in the 6% range, but the total amount outstanding on those was about $160 million.
Not something that we're focused on immediately but of course as the as the market turns that we start generating more cash flow. We all will look to continue to try and bring down our cost of capital.
At the moment, it's probably those ones won't we won't be doing anything with those ones in the in the near term.
Okay that makes sense and final one from me Kevin Big picture, you've done everything you set out to do 18 months ago.
At the last Investor day.
Taking down a lot of this low cost that you've gone through a pretty significant downturn admittedly after huge upturn.
Having any liquidity concerns whatsoever.
As you sit here on the precipice of what you think is gonna be a recovery may not start tomorrow, but sometime in the very near future. How do you feel about the capital structure in the fleet today and is it continuing to do what you've done the last 18 months or do you start to become more aggressive with either the operational financial leverage.
It's a good question John I think you know it.
At the moment, we still as I said in my remarks, we still face a little bit of of uncertainty around COVID-19.
The fundamentals in the background are definitely pointing in the right direction, but I think it still pays to be prudent so we're not rushing to come up with.
A definitive.
Execution plan.
For this quarter I think we'll continue to do what we've been doing strengthened the balance sheet look to pay down expensive debt and as we sit here today. We've got a 50 ship fleet that's exposed to a market that we anticipate will pick up.
Certainly as we as we move from the back end of this year and into next year.
So I think we're well positioned to reap the benefit of all of the hard work that we've done over the last 18 months.
But from now the focus is lets.
Let's continue to do what we're doing and let's see how the uncertainty over the next few months or possibly quarter plays out and then we'll take it from there.
Yeah that makes sense, thanks, Kevin Thanks Stuart.
Sure. Thanks, Sean.
We will now take our next question from Randy given from Jefferies. Please go ahead.
Howdy gentlemen, how's it going.
Good Thanks Randy.
Well excellent at two questions from me first I guess, how do you view the kind of outlooks for product tankers compared to crude tankers at this point in the cycle and are you using this maybe soft patch to clean up some of your LR twos that we're trading dirty to start trading clean again in the near term.
Okay.
Yeah.
I think we've got a we've got nine LR twos that are the bulk of which are have been trading dirty purely because of the returns where we're getting in comparison, we have seen a little bit more volatility in LR two trades over the last say six months.
And that prompted us a few months back to look at.
It may be changing over one or two.
Into the product trade. Since then obviously the the trade hasn't really picked up and I think.
Hello to rates on a round trip basis arm arent necessarily as good as some of our our U S. Gulf of terms on the crude side.
But at the moment, we've got two ships that are trading clean.
Primarily in the far east and I think for the time being that's that's about as far as we're going to go until we start seeing a bit more definitive green shoots in the product space.
I think overall.
You still got large inventories on the.
Product side in Europe, I think is going to be a bit of a drag.
Our view is that it.
Vast majority of our exposure will be in the crude space and we were confident.
Fundamentals are lining up for that.
Over the coming quarters.
Okay, so you're not necessarily a believer that refined products will lead with all of the refinery dislocation and you can kind of increased demand for jet fuel prior to an inflection in crude demand.
No I think the the product trade is always promised a lot and never necessarily delivered it as and when people thought it was going to happen. So.
We do have exposure, we can increase it from two ships to nine.
But at this point in time, where we're not seeing that and as a result, we're trying to make as much money and as bad market as we can and today for us that is trading I shipped dirty.
Yep.
Alright, and then second question you mentioned your recent time charters helped buoy your suezmax rates during the soft patch in the first quarter any further appetite for signing some six month, one year time charters to kind of stabilized cash flow here over the next you know uncertain period.
In terms of putting our ships out.
Correct.
Yeah Yeah.
Yeah, I think we.
Whether it's in aura, we look at it opportunistically.
<unk>.
You know, it's it's finding the right the right customer was right ship in the right position to be able to pull the trigger at the right number.
So far we haven't we haven't seen that yet.
We had a.
A nice transaction that we were able to do to bring in a ship earlier in the year, but on the other charters, we haven't really seen the numbers that we would be willing to.
And lock in that for 12 months, there may be some opportunities within the regional fleets to put out for six months, but.
It's not something we try and plan to do with it a lot of it depends on.
Traders, who come up with positions they need to fill in and then we look at it on a case by case basis.
Got it.
Yeah, that's fair all right well I think that's it from me. Thanks, so much.
Thanks Brendan.
We will now take our next question from Ken <unk> from Bank of America. Please go ahead.
Hey, Great Hi, Kevin store Christian good afternoon.
Maybe just a question for Christian or I don't know if Kevin you want throw out but how much more is left the stores you talked about a little bit of the overhang caused by a couple million barrels still coming out of storage maybe talk to us from your view of what's still left to to impact those rates.
Yeah, Hi, Kevin It's Christian here in terms of the land based storage. It does seem like we are pretty much down to five year average is now.
If you look at the IAA report that came out yesterday.
I think they said that.
In the OECD.
Inventories are only about 2 million barrels above the five year average compared to two.
250 million barrels in the middle of last year.
So suddenly the land based storage is looking like it's back to normal levels and then on the floating storage.
So almost I would say, it's a normal levels as well certainly in the mid sized tankers there aren't really any aframax suezmax is doing storage contract beyond what we would normally expect in a typical market that may be.
At 10.
10% to 15 vs that Theres still day stories and might come back that volume.
I think we're almost at a normal market now in terms of inventories, which of course is positive because it means as demand recovers through the second half of this year.
It will create a deficit of oil that needs to be sales that we do certainly expect that.
It will increase production.
The back end of this year over and above the $2 1 million barrels a day that they've already pledged between now and July which of course is going to be very positive for tanker demand.
So then with that so I mean, the environment set up there it sounds great, but talk about the spot rate softness you've seen in into Q relative to I guess, the the 50% of the spot rates booked.
Do you think we see downward pressure on on what you've booked through may and June or or are we finding a floor, maybe just talk about that relative to what you quote.
Well I think we've from.
I think we've found a floor to be honest you never know in tankers, what disruptions might occur. We saw in March we are very good spike for off from axis that was caused by weather and obviously the Suez Canal for provide 10 day period.
But I think at these levels dish.
Roundabout these levels should be where.
Where we go I mean, one of the challenges we faced as.
Over the last six months, we have seen more volume more fixing volume coming to the markets both on Aframax and Suezmax is the.
The challenge has been that we've seen the unwinding of this floating storage, which is negated all of that activity. So hopefully is as now that we're down to sort of normalize floating storage levels.
If the activity continues to increase and we see more Russian barrels coming out of the black sea and the Baltic that should help both suezmax and aframax rates in the Atlantic.
And I think maybe maybe that might help improve a little bit on the quarter, but it's I think it's too early to tell.
It's not.
It's not going be a great quarter, we know that.
It's not going to miraculously improve overnight, but I think.
Steady improvements could could be seen going forward.
Sorry for the minor one for Stuart, but just.
The voyage expenses were elevated.
In the first quarter, just given the increase in spot days. It just any thoughts on that going forward. Obviously last year was was very different than normal just given COVID-19 impacts.
Expect similar levels on on expenses.
Voyage expenses are as you said correlated with the number of spot days that we had.
So theres two things going on there. The other one is the re delivery of our time charter fleet. So we had a number of vessels out on time charter and as those come back into the fleet, we start paying voyage expenses on those so thats a normal.
Normal movement, you would expect.
We have a small I would charter fleet now so voyage expenses should be.
You know relatively stable subject to movements in fuel costs.
Alright wonderful.
Just wanted to see if there was anything different than that.
And then I guess, just Kevin do you think about if we start seeing a rebound in the market do you like the fleet size do you feel.
<unk> got the mass scale you want do you look to sell anything and you know if we're starting to see asset values go up you mentioned kind of the re chartering rates. Your sale Leasebacks day, you know how do you how do you think about the the fleet scale at year as as we see that day.
A rebound hopefully rebounding market.
Well I think as we look at TNK today, I think the company is very well positioned at.
At this point in time with with a 50 ship fleet pits.
Increasingly as those time charters in the Suezmax size of rolled off will be increasingly weighted towards the spot market that is as we said, we think should start to improve as we move through the latter half of this year.
So whether we add to that exposure, whether its through time charter additions or or asset purchases.
We'll have to see what opportunities arise.
The presented good value.
Asset prices have moved up this.
This year quite rapidly.
So I don't think you're going to go you're going to see us go out and reach out.
And pay up for to add another 10 ships from the fleet, it's definitely not necessary with a 50 ship fleet and I don't think it'd be prudent at these price levels. So.
I don't think you'll see us embarking on a buying spree, but if there's one off opportunities where we see.
A deep discount or a good value to add we may transact.
On the other hand, as you said the asset prices going up.
We could also be sellers, we could if we get the right opportunities at the right price for some of our older vessels.
We may decide to transact and unlocking some of that some of that value there.
So I think where we're agnostic, where we're both buyers and sellers are in charters and our charters it's.
Where the market could go to we we need to remain flexible and agile.
And I think we will look at each and every opportunity on a case by case basis and in trans at only when we think there is there is volume to be had.
That's helpful. I guess I'd, just I'll throw in there do you see more.
If you were to put more chance of upside I would presume youre going to say you see more chance of.
Rising given that that comment on the floor rates that then you would see more pressure on the downside so.
More opportunities.
Yeah.
Yeah, I think the fundamentals are pointing towards improvement I think we've we've also.
We face a pandemic is uncertain.
So we have to be prudent and non diving with with both feet.
Right and the starting whistle so.
I think as I said to John on his first question I think it pays to be prudent and to be cautious.
Our outlook going forward is definitely for improvement as we move into.
The back end of this year and into 'twenty, two and 'twenty three.
So I think opportunities will come up.
Yes.
Great I appreciate it Kevin start Christian Thank you for the thoughts.
Thanks, Ken.
We will now take our next question from Mike Misfire from H C. Wainwright. Please go ahead.
Thank you good afternoon.
Just a follow up question on Ken's question.
I mean, you spent the last couple of years strengthening your balance sheet.
Can you talk a little bit more how you feel about fleet renewal over the next couple of years I mean, you had a strong cash position.
And Oh, you got stricter upcoming emission targets and just curious how you think about that going forward.
Yeah, like I said, where we're very comfortable with where TNK stands today.
Our average fleet age is 12 years, which is more than manageable.
We've got good franchises in the U S Gulf and in the far East, where we can trade younger ships and older ships alike without any restriction.
And over the years, we've we've invested in our fleet. We spent the money on improvements to make them more fuel efficient.
So you know the upcoming regulations in 2023 don't scare us.
We we've made good improvement.
Over over recent years in terms of reducing our our emissions.
So we at this point in time, we do realize that every year. Our fleet gets older and we will have to start investing in newer tonnage.
But where we sit today, we don't think that that's a decision that we've got to rush into them. We think we have time and we think we have a fleet that we can continue to trade for for years to come.
I think if.
If you look at.
The regulation that may be coming that is also an uncertainty.
And to rush to order new builds are with propulsion systems that.
Maybe less efficient compared with technology that gets developed over the coming years or doesn't quite meet regulations that may be coming up we don't know about.
We just feel that at this point in time it's.
It's better to sit and trade the fleet that we have and generate.
Good good returns.
With the equity that we have in the ships.
Do you feel that the oil companies have to take the lead there.
The prudent way would be to build against time charters.
No I think you've seen that.
Shell and total loans from others have gone out and and look to secure LNG propulsion tanker.
Tankers.
Based against against time charter, So I think that obviously gives you know I'm.
Ship owners, the confidence to invest in a technology, but I think there's still a risk.
And Ah.
Other ship owners, who have invested net realized that.
The technology in future fuels is being developed at a far more rapid pace today than it was even 12 months ago.
So diving in purely on LNG propulsion may.
May not be the.
The only answer.
I don't think it would be necessarily the wrong answer, but it might be the only answered it's available and they may be cheaper more efficient alternatives that come come along so.
Think.
You know the oil companies will will drive the change into the new technologies, but I.
I think as we sit here today, we're confident that they will also still needs.
Fuel burning.
Good solid well maintained quality Aframax and Suezmax is one buy good companies.
And I mean are you looking at any potential.
New designs or and whats the delivery timeframe right now if you were to order.
Suezmax vessel or Aframax vessel.
Okay.
I think if you're Christian you can probably give you more detail, but I think at this point in time, if you're looking for a quality yard in South Korea, or China, Youre looking at 'twenty 'twenty four for second half delivery.
There may be slots available in 'twenty, three but they're at a second tier yards.
Okay, great. That's it from me thanks.
Thanks Magnus.
It appears there are no further questions at this time I would pass the call back to the company for any additional or closing remarks.
Okay.
Thank you for joining us today, and we hope that you and your families remain safe and we look forward to speaking with you next quarter.
<unk>.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].
Okay.