Q3 2021 Teekay Tankers Ltd Earnings Call
Welcome to the Teekay tankers Ltd's third quarter 2021, earning results conference call. During the call all participants will be in a listen only mode.
You will be invited to participate in a question and answer session at that time. If you have questions 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 a reminder, this call is being recorded 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 parts of C. W.
Www Dot Teekay tankers dot com, where you can find a copy of the third quarter 2021 earnings presentation, Kevin It certainly will need 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.
<unk> third quarter 2021 earnings release and presentation are available on our website I will now turn.
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 us today for Teekay tankers third quarter 2021 earnings conference call.
Joining me on the call today are Stewart.
Teekay tankers CFO.
Christian Waldegrave director of research.
Moving to our recent highlights on slide three of the presentation.
Teekay tankers had a negative adjusted EBITDA of $16 million during the third quarter down from negative $7 million in the prior quarter.
We also reported an adjusted net loss of $50 million or $1 48 per share certainly third quarter.
Third to $42 million.
Or $1 23 per share last quarter.
Our results were largely due to weak spot tanker rates and a heavy drydock schedule during this quarter.
Despite another challenging quarter, we continue to maintain a strong balance sheet.
Liquidity was $209 million and a net debt to capitalization of 39% at the end of the third quarter.
In addition, we completed refinancing of eight vessels with new lower cost sale leaseback financing.
Lower our overall cost of capital.
Sure we'll ever elaborate on this later in the presentation.
In the freight market spot tanker rates to historic lows during the third quarter was the weakest rates.
Since the 19 <unk>.
However rates have seen a modest improvement starting in the fourth quarter due to a combination of higher trade volumes positive short term factors.
There's further potential upside over the winter months.
Although the timing of a more significant market recovery remains uncertain due to COVID-19, we believe many key indicators continued to trend in a positive direction.
I'll touch on in more detail later.
Lastly, the company took advantage of relatively firm secondhand tanker prices are selling at 2003 built aframax approximately $12 million.
Turning to slide four you look at recent developments in the spot tanker market.
As noted in my opening remarks spot tanker rates to historic lows during the third quarter.
Primarily due to ongoing OPEC plus supply cuts as well as a series of unplanned outages and non OPEC countries, which led to relatively low trade volumes during the quarter.
Tanker demand was also negatively impacted by the Delta COVID-19, barragan, particularly in Asia, where renewed long bangs led to reduced mobility.
This was further compounded by relatively weak Chinese crude oil imports due to a combination of inventory drawdowns and reduced import quotas for independent refiners.
Finally, an increase in crude oil price led to higher bunker fuel prices for our vessels further weighing on vessel earnings during the quarter.
Spot tanker rates.
Modestly improved at the start of the fourth quarter.
As shown by the chart in the middle of the slide.
This improvement has been spurred by an increase in trade volumes in recent weeks as OPEC plus returns more supply to the market I.
I mean, some of them non OPEC outages in Q3 starts to ease.
Looking ahead, the IEA projects, an increase in global oil production was $2 7 million barrels per day between September and the end of the year due to the continued unwinding of OPEC plus supply cuts as.
As well as more supply from non OPEC countries.
This should lead to further increase in crude oil exports and therefore tanker demand.
Three months.
However, we should caution that old low global oil trade is improving.
It remains well below pre COVID-19 levels and more oil supply is needed if the market is to return to full health.
Global oil demand is expected to improve during Q4.
Could get a boost this winter and the global energy Crunch, which has led to record high natural gas and coal prices in some regions and.
And as encouraging some power plants to switch to cheaper oil for power generation.
As shown by the chart on the right side of the slide the <unk>.
He expects fuel switching.
To add 0.5 million barrels per day to <unk>.
Global oil demand in the coming months so.
So we're very cold winter could boost demand by up to a million barrels per day compared to the base case.
Additional heating requirements.
This coupled with normal seasonal factors, such as weather delays or potential positive factors spot tanker rates. This winter.
Turning to slide five we provide a summary of our spot rates in the fourth quarter to date.
Based on approximately 50% and 37% spot revenue days booked teekay tankers fourth quarter state Suezmax and Aframax bookings have averaged approximately $11600 per day and $10300 per day, respectively.
For LR two fleet based on approximately 35% spot revenue days booked fourth quarter to date bookings have averaged approximately $10200 per day.
All of which are higher than the rates achieved in Q3.
To optimize vessel utilization in anticipation.
Anchor market recovery, we have tactically brought forward for additional dry dockings into the fourth quarter.
For more details please refer to the appendix slides summarizing I dry dock and off hire schedule.
Turning to slide six I will give an update on sheet.
But the key indicators, we track, which we believe point towards a significant feature tanker market recovery.
One of the main reasons that tanker rates have been so weak in 2021 is that while all demand has recovered and.
Nice stand at less than 2 million barrels per day below pre COVID-19 levels oil trade has remained relatively flat.
Global oil production has trailed demand for most of the year due to OPEC plus supply cuts, resulting in a large drawdown in global oil inventories to levels well below the five year average.
The tanker market is linked to the oil inventory cycle.
In periods, where we see large inventory drawdowns tend to contribute to weaker spot tanker rates as drawdowns essentially.
Displace oil imports.
This has been the case for virtually all of 2021 and helps explain why spot tanker rates have been at historic lows. This year.
Looking ahead to 2022 global oil demand is expected to rise by between three and 4 million barrels per day as the recovery from the COVID-19 pandemic continues.
The World will therefore need significantly more oil in the coming months and years to meet rising demand and to replenish depleted oil images.
With this in mind, the OPEC plus group plans to unwind its remaining supply cuts by September 22.
While non OPEC countries are expected to add a further 2 million barrels per day.
Together this should lead to a significant increase in oil production next year and more importantly for the tanker market and increase in oil trade.
Turning to fleet supply outlook continues to be very positive.
<unk> tanker ordering grind to a virtual halt in the third quarter, we just 0.8 million deadweight tons of orders placed the lowest quarterly total since the second quarter of 2009.
Elevated new building prices, which are currently the highest since 2009 are expected to limit further newbuild orders in the near term.
Meanwhile, shipyard availability is becoming increasingly scarce as record containership ordering is filled shipyard capacity well into 2024.
The third quarter of 2021 also saw an increase in tanker scrapping with $4 7 million deadweight tons removed highest quarterly scrapping.
Total since the second quarter of 2018.
The combination of low tanker ordering and higher scrapping bodes well.
The limited future fleet growth.
Currently estimating approximately 2% fleet growth in both 2021 and 2022 before minimal fleet growth in 2023 scrapping is expected to largely offset new vessel deliveries.
And some fundamentals continued to trend in the right direction and point towards a future market recovery.
The exact timing of this recovery remains uncertain. However.
We will continue to depend to a large extent on how the COVID-19 pandemic and the global economy evolve in the coming months.
I'll now turn the call over to shirt covered the financial slide.
Thanks, Kevin turning to slide seven we highlight the company's strong financial Foundation.
As a result of our focus on reducing debt and building financial strength during last year's market upswing, we have maintained a strong balance sheet.
The company has a pro forma liquidity position of $209 million, which provides financial resilience in this weak freight market.
Since may 2021, the company repurchased eight vessels that wonder higher cost sale leaseback financings using existing liquidity in may two of these vessels were repurchased for $57 million, while the remaining six vessels were repurchased in September for $129 million.
I'm pleased to announce that we completed lower cost sale leaseback refinancings for all eight vessels in September and November.
While our repurchases and refinancings decreased our quarter over quarter pro forma liquidity by approximately $30 million, we have materially reduced our overall cost of capital with estimated interest expense savings of approximately $11 million in the first 12 months alone.
Lastly, we also have a low financial leverage with net debt to capitalization of 39% and a manageable debt repayment profile with no significant maturities until 2024 with that I will turn the call over to Kevin to conclude.
Thank you 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.
We look forward to the continued transition to a more normalized world.
With a 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 anticipated tanker market recovery.
With that operator, we're now available to take questions.
Thank you I'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is not to allow your signal to reach our equipment again Thats star one to ask a question.
Our first question comes from Jon Chappell with Evercore ISI.
Thank you.
Good afternoon.
Kevin just a big picture one.
Maybe simple maybe complicated where to from here. So two years ago you laid out this path in your Investor Day I'm, a heck of a lot has changed in that period, but you've accomplished everything on the financial side as far as the.
Film Leasebacks are concerned in the balance sheet and now here you are with probably the best balance sheet in the industry, but a bit of an older fleet on the precipice of what's hopefully a big recovery off as you noted the worst market in <unk>.
Since the eighties Where's the focus for the next 12 months as it relates both to the operational leverage in the financial leverage.
Well good question, John I think be the main focus right now is just keeping our eye on the ball.
As we look to what uncertainties COVID-19 pushed.
Put in front of us if any.
It appears that.
I'm not fun, we seem to be getting ahead with the vaccines around the world.
Hopefully that plays into what we see is an improving tanker market.
So strategically I think what we've done as you said over the last couple of years is really constrained from.
The company in.
Get our organization.
Better place to to get ready for the upturn when it does come it's really looking at maximizing returns from the fleet that we have currently have 50 ships, we feel that's a comfortable size.
The age profile is average with the rest of the industry. So as you've seen US report this quarter, where we're selling some of the.
The older units as they because we can get good pricing for them. So they can focus right now is.
Making sure we weather the rest of this the storm that's in front of us.
We've been going through for the last two years.
And then making sure that we can absolutely drive revenue.
Going into a much stronger market.
Beyond that I think the eyes, obviously on you know what would be the challenges the industry has faced in terms of reducing emissions in and development of new technologies.
As are our older fleets starts to sell off we will have to look at some of that that new technology and make some decisions.
With regards to fleet renewal.
That's further down the road at the moment, it's a.
It's more focused on the <unk>.
The next year or two years of maximizing our revenue generation and building an even stronger.
Organization.
Yeah.
Sense and then finally.
Just to be fair I've asked all the other tanker companies. This week. The same question you've laid out all these different inflection points for you. It was on page six of the slide deck, that's just really compelling and Howard so much closer hopefully to the recovery, but what can go wrong I mean, if we just take.
New variants and independent make out of the mix, even though we're not necessarily completely through that where else can maybe something kind of come up and tripled recovery before it really gets underway.
Well, let's take the simple one the on the fleet supply side I don't see anything in the forecast that could that could trip up her recovery.
<unk>.
Shipyards are full the container ordering seems to continue unabated Ah theres LNG ordering to come.
So you know I can't see.
Certainly in the next couple of years, where fleet supply will be a challenge.
So it really comes down to.
What's what's lining up on the oil side.
As we look at all the different variables that play into a market.
That makes sense.
Turning to judge when this recovery really starts to take off in earnest.
Theres nothing in our line of site other than reduced overall demand.
Is that that could drive a smelter isn't positive for our industry.
Hum, calling the actual inflection point is she told because nobody really knows when when this thing is going to ton but.
As we've pointed out in our slides.
All of the elements that we keep an eye on and more beyond that are all pointing to a much more positive environment for us going forward.
Okay.
I appreciate your insights thank you Kevin.
Thanks, Sean.
Thank you. Our next question comes from Randy given <unk> with Jefferies.
Howdy gentlemen, how's it going.
Good thanks, Andy how about you.
Great great.
On the last call we mentioned that you were.
Starting to clean up.
Dirty.
Got it.
If you go back to the clean products trade.
He kind of updated thoughts or commentary around that.
Getting more bullish on the product side of the equation.
Still think kind of crude.
Pardon me.
Yeah, we did actually.
We follow them during the over the summer period in total we converted four ships in the fleet trading clean cargos.
Which have had.
We've had positive results.
I think going forward, though.
The anticipated recovery in the product side to sort of lead the crude side hasn't really materialized and if you look at sort of the aframax LR to returns on balance today.
You know I think where we are uncertain, whether the LR twos will continue to.
To be the place to trade it.
So we're actually got a couple of ships that are coming open the next few weeks.
And the termination of the moment and probe we can turn those back into the crude trade.
But you know I've said this many times on calls before that's that's the beauty of DLR two we can clean them up and if we don't like what we see going forward, where we can turn them quite easily back into.
The crude side.
Sure.
That's fair.
And then kind of a follow up question on the balance sheet. You know, we're still in the high Thirty's, let's call. It net.
Debt to cap.
Have you kind of analysis or do you have any kind of real goal targets there on leverage ratio or you make a.
Our strategic shift in capital allocation or is it just all kind of market sentiment in China.
No we don't have any.
Fixed number that we're aiming to get to I think a lot comes down to what we see is lying ahead for us as a company.
Both in terms of our market as well as the profile of our fleet.
And what we're doing.
But I also you know we've said this many times that we're in the tanker market and the tanker industry is a very cyclical business. So the stronger we can build our balance sheet and the lower we can cause lower the debt level that we can carry them.
That provides us financial flexibility that allow us to to make the right decisions at the right points in the cycle. So I think.
Going forward I don't see us changing that strategy.
Or that approach to how we want to.
The company or our balance sheet.
Okay, No that's fair so nice to see some progress there on the quarter to date rates, so hopefully that thank.
Thank you.
Thanks Randy.
Thank you. Our next question comes from Magnifier with H C Wain Wainwright.
Yeah, good afternoon, or I guess, it's a morning I'm on the West Coast still Kevin maybe just a question for Stuart but yeah.
The Guy that bought I mean, Opex you did a great job on Opex in the quarter came in significantly below your guidance I think you'd guided $44 million came in at 39 and going forward you are guiding for $40 million.
Can you tell us a little bit what's going on there and if that's a good run rate for 2022.
Sure I can take that one so in Q4, we had a little bit less.
Less expense related to some of our crew changes than we were expecting so that helped reduce our our opex.
And we also tend to do a lot of bulk purchasing at the beginning of the year to try and get a volume purchases to reduce our opex and that bulk purchasing program was actually even a little more positive than we had expected, which which reduced our spending in Q4 as well. So overall, we were we were we as you said we had a good.
Good quarter for Opex in terms of our Q4 guidance as you said, we've got it around 40 for Q4 and I think for run rate probably about 41 is a reasonable run rate as I said, we tend to have a little bit higher the opex at the beginning of the year as we do bulk purchasing.
Yeah.
Okay. So I guess, we were running.
Higher through the most of the earlier in the year or so.
What kind of costs are besides the the you know buying some of these.
Suppliers early in the year is there anything else there that that.
It contributes to the lower run rate, because that's pretty a lot lower than the previous run rate.
Yeah, I think I think the three the two main factors there as I said is the bulk purchasing program and then also some of the expenses related to Covid and crew changes and some of those things that we were that we were taking on earlier in the year and that we're a little more expensive earlier in the year.
And those costs have come down through the year.
Okay. Thank you for answering my questions.
Yeah, you're welcome.
Thank you. Our next question comes from Ken Hill with Bank of America.
Hey, great good morning.
Kevin can you talk a little bit about trends historically on on the Drawdowns you you mentioned the drawdown of inventories. So is there historically a level where you see the market say, okay. That's that's as low as we want to go in and start to build the stocks up again is there kind of any inflection points. You can you can point to historically.
Yes.
Well I think a year ago I, probably would have told you Ken.
We get down to the five year average historically or slightly below the five year average.
Typically start to see oil producers opening talks a little bit but.
As we stand here today, where you know 215 220 million barrels below the five year average which is.
You know almost the same as what we were above it.
Half of 2020, we were 250 million barrels above the average so we have come down a massive amount.
And we might learn something latest day when the when the OPEC meeting adjourns, but so far it appears that the the Oncotype is too.
Relief barrels into the market.
Instead, he pace rather than open up fully so.
I don't think there's a number certainly not a number that we had TNK looked at it and say okay. When we hit this number of inventory level.
Things are going to change I think it's just one more factor in there.
The whole mix of.
Variables that come into how our market operates.
But I think we're optimistic that it cant go much lower wear.
Christian you might be more accurate on this but I think where we're suddenly getting close to 60 days of resource supply.
I mean, historically when you get down to those levels too.
Two things happened one oil price goes up and to eventually they turned the pumps back on more significant Christian anything to add.
No no I was just getting back to that point, we were at about 62 days of fully cover at the moment in the OECD and like Kevin said once you get below 60 that tends to be the point at which you get a bit of an oil price spikes.
With inventories still drawing in the in the short term here.
You know I think we could expect the situation to stay pretty tight inventories to come down a bit further.
As I packed keeps releasing oil onto the market at the pace that it's doing plus some non OPEC plus supply coming back.
Hopefully, we'll start to look a little bit better as we get into 2022 and the little supply front.
And that should then have to stop punish those inventories and that'll obviously be positive for the tanker market.
Well I guess, that's not too encouraging if we're going to be driving.
In the near term.
<unk> <unk>.
Structure, let me.
Yeah, Kevin you're moved here I guess, if you're looking at rates that are rebounding is there thoughts now of maybe adding more charter in vessels or or do you are you you mentioned I'm comfortable with the 50 vessels before it would would you take any moves now to position yourself, even more for that inflection or it.
Just given the unknown, it's not we're setting it up.
And no I think you know.
We've got different levers in the in charter portfolio has been a very good lever for us historically going into we think is going to be a strengthening market. So.
Although we say we're comfortable with the 50 ships that we have today.
We say that because asset prices are alright, or 10 year highs and we don't feel that theres value there to be a purchaser of ships, but on the in charter side.
We've done this three in charters already earlier in the summer and we set after we did those we would take a pause and we would.
Look at where we see them.
The economy going and the recovery coming in and what Covid has to offer and I'm glad we did because I think the.
The markets softened towards stabilized I would say not soften but more stabilized.
So I think we've got an opportunity to go back in and add to that portfolio of three ships. So I think as the.
As the green shoots.
Yeah.
You know appear I think you'll probably see US go back came in and try and get some some ships on a short term to mid term basis anywhere from six months out to three years.
Matt.
Well it depends on the on the ship and at the rate that we can bring within that.
Yeah.
So maybe something we see more activity, depending on where rates go.
Looking at your chart on page four just it looks like we're maybe a little delayed in this and the seasonal rebound.
From that I guess typically it starts a little bit more end of October I thought it was more Thanksgiving that you started to see that ramp up is that something you any reason to not see that.
Seasonal strength given the environment you set up for the as we move to the end of the year here.
Well I think you know every year, we say.
The fourth quarter, a stronger quarter. Some some years I've seen it take off right at the beginning of end of September going into October and some years I've seen it happen in the first week of December.
So I don't think there's a.
This is a week or so.
It is a month, where you would expect things to take off.
And I think what we've seen already is in October things picked up in that strength seems to have continued in November.
Where it goes from here I think.
It will be a stronger quarter definitely compared with with Q3, but you know what.
It returned to sort of the levels we saw it.
You know in the early part of 2020 now.
We're going to get to those kind of highest not when we up $4 7 million barrels of crude still not being transported around the world.
But I think it will still be a healthy quarter.
And we may see further improvement as weather delays.
Another seasonal.
Limitations on the logistics chain come into play.
So that's certainly what we're seeing across the Aframax segment.
The Suezmax segment to a lesser degree is we're getting more pockets of volatility.
In the summer it was more.
Hurricane Ida and that affected the U S Gulf and everywhere else who's a little bit flat, whereas now we're seeing the med to tick up a little bit we're seeing some volatility in the north sea.
In North Asia is starting to tighten so.
It's it's indicating that.
Things are starting to tighten up or not.
Massively or you know are overly tightening, but it certainly more.
More tightened and it was during the war.
Called the trough in the summer.
Hum.
I wouldn't I wouldn't sit here today and I'm trying to predict exactly how long it's going to go.
Great Kevin Stuart I appreciate the time thanks.
Thanks, Ken.
Thank you. This concludes our question and answer session I would like to now turn it back to the company for any closing remarks.
Thank you for joining us today and thank you for your support and TNK talk to you next quarter Bye bye.
Hi.
Yeah.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
Okay.
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