Q2 2021 Teekay Tankers Ltd Earnings Call
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Welcome to the Teekay tankers, Ltd's second quarter, 2021 and earnings results Conference call.
During the call all participants will be in a listen only mode.
Afterwards, you will be invited to participate and a question and answer session.
At that time, if you have a question participants will be asked to press star 1 to register for a question.
For assistance during the call. Please press star zero on your Touchtone phone.
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. Please go ahead.
Before we begin I'd like to direct all participants to our website at www Dot Teekay tankers dot com, where you'll find a copy and the second quarter 2020 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 adults projected by those forward looking statements additional information concerning factors that could cause actual results to materially differ from those and the forward looking statements is contained and the second quarter 2020.
1 earnings release and earnings presentation available on our website.
And now I'll turn the call over to Kevin Mackay, Teekay tankers, president and CEO to begin.
Thank you Ryan.
Hello, everyone. Thank you very much for joining yesterday Teekay tankers second quarter 2021 earnings conference call.
And I Hope you and your families are all safe and healthy.
Joining me on the call today are Stewart Andrade, Teekay tankers, CFO and Christian Waldegrave director of research Teekay tankers.
Moving to our recent highlights on slide 3 of the presentation Teekay tankers had negative total adjusted EBITDA of $6.8 million during the second quarter down from $15.9 million and the prior quarter.
We also reported and adjusted net loss of approximately $42 million or $1.23 per share during the second quarter compared to an adjusted net loss of $22 million or 65 cents per share last quarter.
Our results were largely due to weak spot tanker rates.
Heavy dry dock schedule period during the quarter and the exploration of fixed rate time charter out contracts secured during strong tanker market last year.
Despite a challenging quarter, we continue to have a strong balance sheet with pro forma liquidity of $274 million and.
Net debt to capitalization is 36% at the end of the second quarter.
In addition, as previously announced we are and the process of lowering our cost of capital by refinancing vessels have been and higher cost sale leaseback and structures, which Joe will elaborate on later in the presentation.
Lastly spot tanker rates continued to be very weak and second quarter due to the ongoing impact of COVID-19 and.
And this weakness has continued and the early part of Q3.
Looking ahead, although the near term outlook is uncertain and future COVID-19.
We believe many key indicators for a tanker market recovery continued to improve.
Which I will touch on and more detailed later in the presentation.
Based on our forward view, we counter cyclic and chartered 3 additional aframax and from access for 18 to 24 months with options.
And beyond from periods.
Turning to slide 4 we look at recent developments in the spot tanker market.
Spot tanker rates remained very weak and the second quarter, primarily due to the ongoing impact of COVID-19 on oil demand.
And associated all supply cuts from the OPEC plus group.
And were also a number of short term factors, which negatively impacted rates during the quarter.
Although OPEC plus started increasing oil supply from May onwards, this didn't translate fully into additional crude exports.
Eddie Arabia increase the domestic consumption of oil for power generation during the summer months.
We also saw a decline and long haul oil movements from the Atlantic to Pacific <unk>.
During the quarter due to a widening of the Brent Dubai oil price spread.
And a drop in average voyage distances, which was negative for tanker ton mile demand.
Lackluster Chinese crude oil imports, we're also a negative with imports down 3% year over year in the first half from 2021.
This is due to a combination of reduced product export quotas for independent Chinese refiners, you taxes on bitumen and other feedstocks and inventory drawdown and due to higher oil prices.
The first half of the year also saw significant growth and available fleet supply.
And the return of shifts from floating storage.
And our front every order book delivery schedule.
Using the Suezmax sector as an example, 20 and 22 new buildings scheduled for delivery. This year have already entered the fleet.
The flip side of this second half of the year, we'll see a much lower delivery schedule and therefore relatively low fleet growth compared to the first half.
Finally, higher bunker prices and negatively impacted on tanker earnings in recent months.
Prices have increased by approximately $100 per ton since the start of the year and she is equivalent to a reduction and spot rates were approximately 3 to $4000 per day.
The weak spot tanker market has also weighed on time charter rates and as shown by the chart on the right and slight.
Although the near term outlook remains challenging we believe that there will be a stronger freight market over the next 2 to 3 years and we have.
And therefore, taking the opportunity to Kansas Cyclically and charter 3 additional off from axis for periods of between 18 to 24 months and an average rate and $17800 per day with extension options, which we believe represents an attractive risk reward and has been profitable lever for us during past tanker Mark.
Cycles.
These vessels will deliver over a staggered period from mid Q3 through the end of Q4.
Turning to slide 5.
And we provide a summary of our spot rates and the third quarter to date.
Based on approximately 41% spot revenue days booked teekay tankers third quarter and 8 suezmax bookings have averaged approximately 2000 and $400 per day.
These lower averages are partially the result of the timing of repositioning voyages for unfixed vessels, which are incurred bunker fuel expenses and the near term without offsetting charter revenue, which will.
Which will be recorded later in the quarter when the vessels are fully fixed.
Yeah.
Current Suezmax friendship TCE returns are averaging 5000 and $600 per day for the latest clerks and spot rates being reported.
For Aframax and <unk>, 2 fleets, which are predominantly trading dirty.
Based on approximately 36% and 38% spot revenue days booked third quarter and to date bookings have averaged.
Approximately $6200 per day and $8100 per day, respectively.
Lastly, and anticipation of an improved winter market, we will complete 10 of our scheduled 12 dry dockings by the ending the third quarter.
Turning to slide 6 and you look at some of the key indicators, which we believe point towards a tanker market recovery and we should continue to improve over the past quarter.
Oil demand continues to recover in tandem with the rollout of global COVID-19 and vaccinations.
Particularly in North America, and Europe, where we're seeing a significant recovery and transportation fuel demand during the summer months we.
We expect oil demand will continue to recover through the second half of the year and to revert back to pre COVID-19 levels sometime in 2022.
However, we also acknowledge that recovery will be uneven across different regions and the COVID-19 may continue to periodically disrupt demand as new outbreaks emerge and fresh travel and mobility restrictions are implemented.
The combination of recovering oil demand and OPEC plus supply cuts is submitted and may reduce bloated oil and metrics, which are now well below 5 year averages.
And we have.
Pushed oil prices above $75 per barrel in the recent weeks.
And the OPEC plus group is recognize that the world needs more oil and in order to keep that market imbalance and has announced a production increase of 2 million barrels today between August and December.
Although they plan to review their policy and the December meeting. The group has also indicated the intent to fully unwind their supply cuts by September of 2022.
This boost to production coupled with an expected increase and non OPEC supply should be positive for tanker demand in the coming quarters.
The fleet supply side continues to look very positive and particular, we would highlight the acceleration and tanker scrapping over the past few months, it's usually a combination of weak freight rates and very high scrap prices, which are currently at a 10 year high.
And total of 6.6 million deadweight tons have been removed from the fleet, so far and 2021 compared to just $3.5 million deadweight tons and all of 2020.
The combination of a relatively small tanker order book low levels of new tanker orders choose a high and new building prices.
And increased scrapping are expected to keep tanker fleet growth and relatively low levels over the next 2 to 3 years.
In summary, although tanker rates have been at historical low levels.
Through the first half of the year, we believe that the market may be nearing an inflection point through a combination of rising tanker demand extreme fleet supply.
It appears and this sentiment and shared.
By the wider market as asset values have risen by over 20% since we started the year and anticipation of a stronger tanker market in the coming quarters and years.
I'll now turn the call over to Stewart to cover the financial slide.
Thanks, Kevin and turning to slide 7 we highlight the company's strong financial Foundation.
And as Kevin mentioned in his opening remarks, we continue to have a strong balance sheet, which provides us financial strength and flexibility we have a pro forma liquidity position of $274 million and a net debt to capitalization of 36% at the end of the quarter.
November 2020, the company has declared options to repurchase 8 vessels that were under higher cost long term sale leaseback financings and may 2 of these vessels were repurchased for $57 million using existing liquidity and thus remain unencumbered and while the remaining 6 vessels are scheduled to deliver and September for 129.
Million.
We have signed term sheets and are in the documentation stage to refinance all 8 vessels with lower cost sale leasebacks for a total refinancing them out of $142 million, which we expect to close and the third quarter.
As mentioned in prior presentations and 1 of our strategic priorities is to reduce our cost of capital and this refinancing will result in an estimated interest expense savings of approximately $11 million and the first 12 months.
Lastly, having reduced significant amounts of debt and 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.
As I've said in past quarters, I would again like to thank 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.
We continue to focus on the safety and wellbeing of our seafarers as we look forward to the continued transition to a more normalized world.
The strong financial position and high operating leverage we believe that Teekay tankers is well positioned to continue to weather the current market challenges and benefit from and anticipated tanker market recovery and the quarters ahead.
With that operator, we are now available to take questions.
Thank you if you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad.
You are using speaker phone. Please make sure your mute function is turned off.
Military chocolate net.
And once again Thats star 1 to ask a question.
Pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll go first to Jon Chappell with Evercore ISI.
Thank you good morning, and good afternoon.
Kevin first question you mentioned, the secondhand values are up 20% and it seems like the disconnect between.
Asset values and and the actual market itself is widening almost by the weak and you guys have a pretty diverse fleet as it relates to age.
And so it's almost like the market's kind of giving you a gift and I understand you want to keep your operating leverage given your view on the market, but whether it's scrapping or selling maybe some shifts that are a little bit less core than the more modern ones have you thought about taking advantage of that opportunity and and monetizing some of your ships and a market that's kind of.
It's still really difficult.
Yes, it's a good it's a good question Darren.
I think we said net paths, where we're open minded and terms of how we approach our sale.
Sales strategy on some of the older units.
So if the right opportunity comes up.
At the right price and it's something that we will definitely consider.
But at the moment, although asset prices, Rob the activity levels have dropped off and the last couple of months.
So.
As of now we haven't.
We haven't really seen anything that we can conclude on.
But it's certainly something that we keep an eye on.
Okay.
And Stuart I kind of ask the sale leaseback.
Every quarter I feel but maybe I'll just ask it a different way this time.
And if this lasts longer than most of us think and and you've certainly laid out a.
He sits on the recovery and the market that's in line with ours, but it's also continuing to be pushed to the right a little bit how many unencumbered vessels do you have what's your opportunity to maybe refinance some other vessels just other liquidity triggers that are not the obvious sell leaseback refinancing that you've accomplished over the <unk>.
Last year.
Hi, Jon So in total at the moment, we have 3 vessels, which are unencumbered 2 of them that we just repurchased in may and we intend to refinance in September as I mentioned and the in the prepared remarks.
Aside from that we have we have 1 of the 1 other vessel, which is unencumbered at the moment.
In terms of other levers to pull.
And you know.
As you can see from the sale leasebacks that were currently doing there.
We do have.
A group of Lessors, who are happy to work with us and that we can do higher leverage financings on if we if we choose to do so so I guess the main lever I would point to is the number of vessels that we have and in commercial debt financing that we could move into sale leasebacks and and that market is quite diverse in terms of.
The loan to value can achieve depending on the counterparty you go with and the.
And the interest rate, you're willing to or or think is prudent to pay. So I think we still do have a fair amount of headroom there.
And as you mentioned, we have laid out the thesis for a market recovery and we have taken some started taking vessels on longer term time charter, I guess, which underlies our confidence and the and the market improving and the and the sort of medium term.
Okay.
If I can just sneak 1 last quick 1 and Kevin and the third quarter to date rates you laid out the repositioning issues associated with the Suezmax is was there similar in the Aframax and then also is there any way to quantify the impact of those because they are usually the numbers the publicly traded companies like yourselves put up.
And there are much better than maybe the industry benchmarks and.
That's not necessarily the case this quarter, so a little bit surprising by just how and how are how low those figures are.
Yeah, I think our and obviously, we've got to acknowledge that the market is at historic lows and as a result of that is challenging.
And perhaps more so and the suezmax side and on the Aframax is key.
Keep keep the tonnage moving and to get the right voyages.
So yes.
And the differential there.
Symbolic portions is definitely more of a suezmax issues and it has been on the App from axis.
And that's really a function of the size of the Suezmax is more of a global trading ship.
And in our case, we happened to have a number of ships that were coming out of dry dock in China.
And as well as we position and a few ships into the Asian market.
And the prior quarter and 5.
And with.
And the lack of supply coming out of Saudi Arabia. Despite there are increases in <unk> and.
And production.
We felt that it was best to reposition ships further afield and to stretch our our program out. So this quarter, we had quite a number of ships that.
It has the the ballast leg issue.
So it's it's more confined to the suezmax and anything else and.
In terms of quantum.
I don't have the exact figure with me but.
You know a couple of thousand dollars a day at least of and impact.
Which you know as the quarter goes on and those ships getting into position and our fixed away, we'll get and the revenue to offset that and we should come up to more.
Market related levels and where were.
And what we're posting here at.
At this point and the third quarter.
Okay. That's great. Thanks, Kevin Thanks Stuart.
Thanks, John Thanks, Sean.
Okay.
We'll go next to Ken <unk> with Bank of America.
Hey, great good afternoon.
Can we just talk a little bit about the Kevin and that is it typical to see asset values climbing ahead of the inflection and spot rates or typically do you see the spot rates move and then and then see the asset values climb it seems like we're doing a little bit backwards is that just the typical anticipation or does this and abnormal part of the move here.
No the asset values typically will look at a number of factors, 1 being newbuild and prices.
And the other 1 being where.
And where the forward market is likely to go as opposed to where the actual market is right now and I think both of those.
Both of those factors have come into play we've seen asset prices.
And quite significantly and the first half of this year.
Driven off of.
Very increase of a very large increase and newbuild prices.
On the back of constrained supply so that has been a big driver.
I think also it's it.
Sentiment driven and although.
The current spot market as historically weak people are looking at the fundamentals that.
Continued to show improvement month on month and.
And it's a question of timing as to when the spot market catches up with with where peoples <unk>.
Perception, and whereas the asset price and the time charter price.
And it's been going.
Krishna you want and give any more detail in terms of the.
Newbuild or secondhand price increases over this last few quarters.
Yes, I think.
It's not unusual to sometimes Cvs and values and move ahead of the freight market I think the degree to which it's happened. This year. It has been a bit unusual and I think as Kevin pointed out.
And various types of some of which have nothing to do with the tanker market and so.
You know the newbuild prices have definitely rocked it up this year.
It's not really due to tanker or does it skew towards the containership orders getting placed.
Higher steel costs.
And then that kind of filters into the modern secondhand values and then of the older and of the spectrum as well we've seen.
Very high scrap prices they've been the highest since I think 2008.
And then you've also had.
This year, if you stay tuned.
And the companies that have been active and the secondhand market and are probably more willing to pay up and pushed the market that day.
Several factors that have driven the pricing up and as Kevin said I think there's also an anticipation of some better times ahead, but I would say that the degree to which they've decouple. This year has been a bit unusual.
Okay. That's helpful. I appreciate that Chris and thanks.
And kind of just 1 follow up.
The move to more Saudi local production and Covid creep on on kind of demand that's going on with Delta.
What size do you see for the recovery I guess, maybe I'm trying to figure out your timing thoughts.
As John mentioned and it keeps getting pushed out to the right. So what what what's your thoughts on when you see this inflection.
And the market rates right, just especially given the low numbers youre talking about were seeing and the market now.
Yes.
It's it's going to be really difficult.
To capture it.
Tours and the exact quarter, but.
As we pointed out on slide 6 are some of the things that we look at in terms of.
Global oil demand.
Relative to where it's been.
Inventory levels coming down and global oil production growth from from.
And from OPEC, plus and as well as non OPEC.
And that is starting to come back.
And that juxtaposed with the U S.
Ever improving sort of tanker order book relative to fleet 5.
Picture that we're seeing fleet supply going forward.
If you look at all of those all the metrics are heading in the right direction I think.
What we highlighted in our and our commentary is we are having said that going to see some regional dislocations because of Covid and you will see is as is happening right now and a few parts of Asia.
Sure.
Companies are cities sorting out companies countries or cities or.
We're going into some form of.
Reduced mobility and restrictions on travel and things like that and we.
And that'll continue grid overall.
And the macro picture.
It seems to be continuing to improve quarter on quarter.
Yeah.
Great I appreciate the fact that steel price appreciate it.
Thanks, Dan.
We'll go next to Randy given with Jefferies.
Howdy gentlemen, how's it going.
Thank you Randy.
And.
2 questions from me first you know you chartered in those 3 Aframax is too crude 1 product for 18 and 24 months.
How did this come about why these vessels and this segment and why that duration.
Yeah, I think we've spoken about it and the past in terms of our.
Our capacity to look at it.
And expanding our spot exposure through the use of and charters and we've done it.
Timed quite successfully and it is.
It's always been incremental are accretive to our bottom line. So we're always in the market looking at.
The potential to bring and shifts.
And at this point.
Looking at where spot markets are and it's obviously, there's a disconnect between the time charter rate and the current spot market.
So looking at short term 6 months 1 year deals, we're obviously off the table.
But given our conviction that over the course of the coming quarters and certainly over the next 2 to 3 years.
We do see.
Our return from some better a better freight rate environment.
So timing can you can never time it perfectly.
Thank you and <unk>.
And 13 of 2014, when we did.
And a large entire program and the last time that that we called it exactly right on the quarter.
The duration allows us the ability to absorb somewhat of a weaker market and the front end.
So that we can take advantage of what we think will be attractive rates and comparison to where spot rates are 2 to 3 years out. So it was really.
Putting our toe and the water and starting to build our book.
And then seeing what develops over the coming quarters and.
And we'll probably make a decision whether to add to that or to continue to sit on the sidelines from here.
And then in terms of your vessels and industry wide, there's certainly been a a.
Subdued nature of scrapping despite low rates high steel prices.
When do you think that turns what causes that did turn you have some 17 plus year old vessels I guess at what age do you start looking at scrapping nose, and then how big of a discount are those older vessels, earning relative to a more modern eco build.
Christian you can probably give you.
Better rundown on the scrap environment right now, but in terms of.
Teekay looks for our fleet.
You know obviously, we have a couple of ships that are getting up to the 17 year.
18 year range.
So we're constantly looking at what is our forward view of the earnings on their ships versus.
Either selling them at today's pricing or.
Trading them out to scrap.
At this point and time, we haven't made any decisions to send their ships to scrap.
We still believe that this market will return and time for those ships.
To be accretive.
But as I said to John and his question were also at the same time looking at the sale market and if the right price comes along for those older ships will certainly execute on them.
And.
Christian and you want to give some more color on the actual scrap macro picture.
I think earlier and the scrapping was quite low as you said, Randy I think net.
Really a function of.
And just maybe had some deeper pockets after the good run and we had at the end of 2019, and the first half of 2020.
But we definitely have seen an acceleration and in the last 3 or 4 months I think.
Look at script scrapping year to day, we're getting close to 7 million deadweight, which is already double what we had.
Last year, we only had about 3 and a half million deadweight last year and the same and 2019 and so I think the you know the very low freight rates are staying that I've mentioned points out and the high scrap prices. It just starting to kick start a bit of scrapping and I think that will then continue into the next couple of years, because we're starting to get into kind of the day parts of the fleet age profile.
A lot of ships, turning H, 'twenty, well hitting that kind of 17 and 18 to 20 year old bracket over the next 2.3 years and.
Another reason why.
And with sort of more positive on the market looking ahead to next year, and particularly 2023. If you look at that yet on the Aframax is I think we've got 72 ships that youre turning age 20.
I think this is kind of at the beginning of this kind of scrapping.
Phase and.
And he has been a little bit of and uptake here and the last 2 or 3 months.
Got it.
That's it for me thank you.
Thanks Randy.
We will go next to Matt and his Fry with H C. Wainwright.
Yes. Thank you good afternoon.
Just a follow up question on these chartered in vessels.
I mean, the rates have been pretty flat on the 3 year have you seen much changes on a 2 year rate or did you feel like you've got a really I mean the rates here has it changed at all and the last.
A couple of months as you've been looking at these opportunities.
Yeah, Hi, Mike Yeah, we did actually.
We have seen some movement on the 2 you're coming off to the levels that we took the ships and on.
And that was why we we felt that.
And maybe now is a time period to start executing.
The 3 year rate is and has held up pretty strongly and that's why looking at our our 2 year deals with the options to extend for for the third year and gave us the optionality to carry it through.
Which we believe will be a pretty strong market and at that point in time.
Yes, I mean earlier and the in the year when when asset prices where were up higher.
It was maybe a bit more conviction in the time charter market.
The second half would kick off in earnest in June.
We saw the 2 year rate certainly higher than where it is today.
And that was why when it when it came off I think we did the first the first shifting and Q2.
And.
And then early in July we pulled the trigger on the on the next 2.
So.
Yes, it's it's come off a little bit.
It could potentially come off further if the spot market doesn't improve in the coming weeks.
But there's also not that much activity.
It's fairly quiet.
Across the market.
Right. So I mean, so I guess this is a kind of a 1 off deal, but you think there's a what's the you said the liquidity is quite low but do you think there is appetite to do more of these charter I mean from from the other side.
[noise] appetite from ship owners to give a ships you mean or right right right at these levels I mean could you do more if you want it.
I think we probably could.
And certainly we were looking at another 1 and we decided not to non to pull the trigger.
From our standpoint.
As I've said, we've in the past, we've built up quite a large and charter portfolio.
And going into a stronger market you may see us do more or be a bit more active.
In terms of building up from scale, but I don't think we should be pulling the trigger all at 1 time.
We felt that doing 1 or 2.
We ended up doing 3 at this point.
As I said the market Mr spot market continues to be weak for the coming weeks you may see the numbers come off a little bit more.
And we'll reassess our forward view and what pricing, we're seeing and we may take some more we may as I said sit on the sidelines and wait until then.
The green shoots and the spot market actually start to bear from some greener color and maybe then we will go back in and do some more but we're it's something that we constantly look at.
On a daily basis.
And I don't think we're going to get and the timing perfect day.
It's certainly something that going into a stronger market, it's an area or a lever that we have pulled in the past I think.
We can certainly pull again was more than just the 3 ships.
Great. Thanks for the additional color.
Thanks Magnus.
And at this time there are no further questions I will turn the call back to the company for closing remarks.
Okay.
Stay safe and we look forward to speaking with everyone and 3 month's time.
Thank you.
This does concludes today's conference we thank you for your participation.
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