Q1 2022 Teekay Tankers Ltd Earnings Call

Good day, ladies and gentlemen, and welcome to the Teekay tankers Ltd's first quarter 2022 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.

At that time, if you have a question participants will be asked to press star one to register for questions or.

Assistance during the call. Please press star zero on your Touchtone telephone. Thank you.

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 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 2022 earnings presentation.

Kevin and Stewart will review this presentation during today's conference call.

Please allow me to remind you that our discussion today contains forward looking statements.

Actual results may differ materially from results projected by those forward looking statements.

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 2022 earnings release and earnings presentation available on our website.

I'll now turn the call over to Kevin Mackay, Teekay tankers, president and CEO to begin.

Thank you Christian.

Hello, everyone and thank you very much for joining us today for Teekay tankers first quarter 2022 earnings conference call.

Joining me on the call today are <unk> and try to Teekay tankers CFO .

Christian Waldegrave director of research.

Moving to our recent highlights on slide three of the presentation.

Teekay tankers generated total adjusted EBITDA of approximately $17 5 million in the first quarter of 2022 and.

An increase from $9 $7 million in the fourth quarter of 2021.

We reported an adjusted net loss of $14 million or <unk> 41 per share during the first quarter an improvement from an adjusted net loss of $25 million or 74 cents per share in the prior quarter.

Our results improved quarter over quarter were primarily due to higher spot tanker rates.

We've maintained a focus on financial strength supported by our recent attractive refinancings and vessel sales and have taken advantage of a firm asset market and Stuart will discuss later in the presentation.

In the freight market after a slow start to the year. We saw a notable spike in spot tanker rates late in the first quarter, driven primarily by the impact of the Russia, Ukraine conflict.

The increase was most pronounced in the midsized tanker segment in which we operate given disruptions to oil trading patterns, which increased ton mile demand.

Rates continue to rally into the second quarter.

Nearly all of our vessels trading in the spot market, we are well positioned to generate strong cash flow and strengthen your market.

Finally, as part of ongoing fleet management.

In 2022, we have completed the sale of three vessels built in 2004 and 2005 for approximately $44 million.

This includes one 2005 built aframax sold for approximately $15 million and two vessel sales that were previously announced.

Turning to slide four we look at recent developments in the spot tanker market.

Spot tanker rates were relatively weak during the first two months of the year due to a number of factors.

These included the ongoing impact from COVID-19 variant on oil demand.

Lower than expected oil supply growth juices temporary production outages and.

And a continued drawdown in global oil inventories.

Further high oil prices, which led to an increase in bunker costs also impacted tanker earnings in the quarter.

However, Russia's invasion of he craned in late February led to an increase in tanker rates, particularly in the Aframax and suezmax sectors due to trade disruptions and the rerouting of cargos.

I will give more detail on the impact of Russian invasion of Ukraine on the tanker market later in the presentation.

As you can see on the right side of this slide since late February the Aframax and Suezmax sectors, having had exhibited significant rate volatility.

<unk>, averaging well above the depressed levels seen earlier in the year and throughout 2021.

We expect this volatility to be an ongoing feature of the market in the near term.

Yeah.

Turning to slide five we provide a summary of our spot rates in the second quarter to date.

In the second quarter based on approximately 52% and 45% of spot revenue days booked teekay tankers second quarter to date, Suezmax and Aframax bookings have averaged approximately $27400 per day and $3900 per day, respectively.

For our LR two fleet based on approximately 43% of spot revenue days booked second quarter's bookings have averaged approximately $30400 per day.

I would note here that the Aframax is have been significantly outperforming the larger tankers in a strengthening market.

LR twos very recently surging at very high levels. After a relatively recent performance.

Early part of the second quarter.

Turning to slide six we look at the near term outlook for mid sized tanker demand following Russians invasion of Ukraine in late February .

The conflict in Ukraine has led to a significant shift in crude oil trading patterns as many countries in the west look to reduce their purchases of brushing oil.

As shown by the chart on the left slide Washington crude oil exports out of the Baltic and Black Sea have remained relatively steady since the invasion.

However, there haven't been a decrease in short haul short haul crude oil exports to Europe .

And a corresponding increase in both the volume and proportion of oil heading to destinations east of Suez, most notably to India.

But at the same time Europe has had to replace Russian crude oil with enforcement farther afield, including the U S Gulf West Africa, and the Middle East.

As shown by the chart on the right slide crude oil exports from the U S Gulf to Europe at the end of April with a highest since March 2020.

With the vast majority being moved on Aframax and Suezmax.

Due to the nature of the load regions involved and the need for greater flexibility and discharge options mid sized tankers benefited more significantly from these changing trade patterns compared to vlccs, where rates have remained relatively weak.

The net impact of these changes has been a lengthening in average voyage distances, and therefore higher ton mile demand.

Given the European Union's recent proposal to phase out old Washington crude oil imports over the next six months and refined products by the end of 2022.

We expect that these alternative trade patterns may persist over an extended period of time.

In addition, the fleet of Russian owned and operated ships, which comprises approximately 5% of the global Aframax fleet.

Just finding it harder to trade, which further tightened available fleets fleet supply in this segment.

Turning to slide seven we look at fleet supply fundamentals, which we believe that the most positive seen in the last two decades.

Rising newbuild prices, which are currently the highest since 2009 and a lack of shipyard capacity continued to limit new tanker orders.

Just 0.2 million deadweight tons of new orders placed in the first quarter of this year the lowest since at least 1996.

As you can see from the top two charts in the slide there are very few tankers on order for delivery past 2023.

The vast majority.

And most major shipyards being full through the middle of 2025.

Limited available capacity to order new tankers for delivery in the next three years.

The tanker order book when measured as a percentage of the existing fleet stands at just six 4%, which is the lowest since clocks and started recording order book data and 1996.

Finally, the tanker fleet continues to age.

Large number of vessels are set to reach age 20 in the next few years with a significant number likely to be phased out.

The combination of small tanker order book low levels of new tanker ordering and a lack of shipyard capacity until late 2025.

And an aging fleet.

Should lead to very low levels of tanker fleet growth over the next two to three years.

Our current forecast is for 2% tanker fleet growth in 2022.

Followed by the zero growth in 2023, and potentially negative fleet growth in 2024, and 2025 when shipped removals are expected to exceed new tanker deliveries.

To sum up spot tanker rates have increased following washington's invasion of Ukraine.

And look to remain volatile in the coming weeks and months as the situation continues to unfold.

Although the near term outlook is uncertain.

Our longer term outlook appears very positive due to an anticipated period of very low fleet growth, which should support stronger tanker rates.

I'll now turn the call over to Stewart to cover the financial slides.

Thanks, Kevin turning to slide eight we highlight the company's healthy financial Foundation.

In March and April we completed our previously announced low cost sale leaseback refinancings of 13 vessels and during the year. We have also completed the sale of three 2004 through 2005 built vessels, taking advantage of firm asset prices.

Including the increase in liquidity from these transactions our pro forma liquidity as of March 31 was $231 million.

Importantly, the sale leaseback refinancings also include purchase options that we can exercise throughout the lease terms in some cases, starting at inception and in other cases after two years.

As mentioned when we originally announced these transactions we secured attractive terms on these new new sale leasebacks.

To those of the expensive sale leasebacks, we were able to unwind last year.

This reflects teekay tankers stronger financial position as well as the strength of the tanker market as indicated by higher asset values.

In addition to increasing our liquidity this financing activity also extended our debt repayment profile appreciably such that we now have no significant debt maturities through 2026 net debt to cap was 42% as of March 31.

With 46 vessels or about 94% of the fleet trading in the spot market Teekay tankers has high operating leverage and we are exceptionally well positioned to take advantage of strengthening rates to generate significant cash flow, while in turn which will in turn enable us to further reduce our debt creating value for shareholders with that.

I'll turn the call over to Kevin to conclude.

Thanks jure.

Driven most notably by the war in Ukraine, and the expanding number of sanctions and supply chain shifts resulting from it.

Size tankers have recently seen a return of significant rate volatility, which has driven a strong quarter to date spot performance.

It's difficult to predict just how long these factors will remain so prominent in the market.

But increased rate volatility is likely to continue at least until the geopolitical tensions receipt and supply change settle into a new normal.

Operating almost completely in the spot market puts us in a good position to generate significant cash flows when rates are strong and we will continue to position our fleet to best maximize these opportunities as they arise.

Looking forward with a very low order book in the coming years and minimal shipyard capacity available to change that fact before 2025, we feel quite positive about the outlook for our market and teekay tankers prospects in it.

With that operator, we are now available to take questions.

Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad star one for questions. Please make sure that mute function on your phone is turned off so the signal can be read by our equipment.

Darwin for questions, we'll pause a moment to give everyone an opportunity to signal for questions.

Okay.

We'll take our first question from Jon Chapell with Evercore ISI. Please go ahead.

Thank you good afternoon, or good morning, or good afternoon, depending where you are Kevin Steve.

Stuart starting with you.

Hopefully a pretty easy one you've done a lot of the heavy lifting on the balance sheet over the last two and a half years, mostly through difficult periods based on your two Q to date, but.

<unk> in most people's views of the market going forward, you're on the verge of generating significant operating cash flow you mentioned some of the flexibility around the leases would finance lease paydowns still be the number one priority.

For uses of cash or do you start to pivot.

To something else, whether that's growth or or capital returns.

Hi, John good.

Question.

You know that it's been a tough tanker market for the last four to six quarters and I'm definitely our focus in the near term is going to be on.

Paying down debt and and strengthening the balance sheet further and we think ultimately that puts us in a position where we can take advantage of opportunities, which will which allow us to long term have the best returns for our shareholders. So I would expect definitely in the short term that will be focused on continuing to pay down debt and strengthen the <unk>.

Our sheet.

And it's still a focus on leases as opposed to bank debt.

Going forward I don't think that will be given the current market conditions, and where we are with our with our liquidity levels I don't expect that we'll be taking on or doing any more leases at the moment, we will continue to monitor to monitor the market in.

In terms of refinancing is going forward I think we'll take a look at the relative balance between those two in terms of the terms of the terms, we can achieve and at our requirements for capital. So I think those are probably both.

Avenues for financing that will explore them on when we need to refinance things in the future, but at the moment, we don't have any plans for doing anything further.

Okay that makes sense second.

A bit of a two part or maybe you can pull and Christian and Kevin.

Obviously, the offers have done incredibly well Suez who've done well relative to vlccs, but the product tanker market has been just consistently outperforming the crude market and these diesel shortages that.

Or going from you know problems to potentially a really dangerous don't seem to have a near term remedy Christian can you maybe talk about the impact that the diesel dislocations, having a on the broader markets and in most directly to you in terms of your LR twos, and Afros and then Kevin any aspirations or plan.

<unk> to take some of your LR twos and clean them up because maybe there's a longer tail to some of these diesel issues.

Yeah, Hi, John .

Yeah as you said I think the situation in the products market is obviously very tight right now, especially on the diesel side.

Inventories are extremely low you'll have seen the margins are at record highs and that's kind of a result of a couple of factors.

One is the demand has recovered quite a bit since the start of the pandemic and especially the diesel.

And as I said inventories had been drawn down quite alone there's a bit of a regional mix mismatch in that as well and that you know I mean.

The western Hemisphere, the refineries are operating at very high throughput and that's been probably exacerbated a little bit by the fact that you know in the last couple of years, we've seen some refinery closures.

In the Atlantic predominantly in Europe , and that now the demand has come back those refineries are having to work really hard to meet demand.

A bit more spec capacity in the in the east So probably going forward, we would look towards Asia, and India and the middle East to supply the volumes in the Atlantic market and I think that's what's really driven the the ton mile.

In terms of the products, having to move much longer haul.

Particularly on the diesel side and into the Atlantic.

And were obviously getting towards done announced they are it's going to be the travel season, and I think with coming out of the pandemic. There's lots of parts of the world where the restrictions have been lifted so now you're starting to see the gasoline margins increase as well and in that field as well so I think the whole product.

<unk> side is going to be very tight going forward.

Binary throughput, it's gonna have to increase where I can see to meet that demand and that's going to continue to drive the demand for the product tankers and in particular the DLR. Two study does their life is going to be some legs on the product side that.

I thought I'd hand, it over to Kevin maybe to talk about our plans on the <unk>. He was in what we're doing with the fleet that.

Yeah, It's a it's a really good question, John and coming that are the chartering.

Darker in Cleveland and I have been looking at.

And in the last week or two at the moment, we have two ships are fully dedicated to clean.

Hum.

At the moment the bulk of the other LR twos are trading Dirty Hopkins being the Atlantic.

Which really is in a prime position to convert.

Much easier to pick up condensate crudes in Asia.

To facilitate that changeover from crude to clean without having to incur.

Hum.

Additional costs for chemical Washington, and things like that so.

The one thing we don't want to do is chase markets.

So we've got a balance you know positioning ships into the far east to get cleaned up.

And if you know other LR two owners are thinking the same way.

We could be missing out on opportunities and on the crude side of the Atlantic So.

It's something we are looking at.

We can get the right combination of cargos to do it swiftly I think you'll probably see us clean up.

Another few ships, but it has to be that balanced between which market. Do you think is going to kind of sustain and how long does it take me to get into that market fully.

Hum.

It's something that we're actively working on daily now okay.

Okay, very thoughtful thanks, Kevin Stewart and Christian.

Thanks, John .

We'll take our next question from Magnus fear with H C. Wainwright. Please go ahead.

Yes, hi, you've just answered my questions on the clean versus dirty but.

You know with with exposure to both the Suezmax and Aframax is do you what do you have a preference in either segment, there or I mean.

Where are you most bullish now as far as the crude side.

Hum.

If you look at our the way the markets are.

Performed over the last few weeks, obviously the aframax.

Despite the very well.

He has held its ground in the far east.

Well as <unk>.

And parts of Europe , less so in the U S Gulf and Trans Atlantic.

Suezmax has have been less resilient if you will.

Despite that we saw has come off across most of the regions Suezmax currently.

So our preference today based on return is obviously off from actions but.

I think we're seeing so much dislocation and disruption to trade patterns.

It is really hard to call.

How this you know these these spikes and this volatility is going to play out between the two segments over the coming weeks.

So I think it's too early to.

To dive in and say Aframax, and we're going to outperform because as we know when suezmax as do take off.

They tend to go tend to spike higher so.

We've got good coverage in both segments.

And at this point and it's just making sure that we position on both of our fleets Aframax Suezmax on and if we can work out a lot too.

Try and maximize our revenue generation from whatever spikes the market offers us.

Okay.

Do you see any changes you know from your clients traders are about securing ships for the second half of the year, you know or how are they looking at the market currently.

Yes.

The short term some.

Three 612 month time charter market has definitely picked up in terms of customer interest levels.

Certainly on the clean side LR twos are somewhat of a hot commodity at the moment.

Again, it's more of that shorter term.

Period, Theyre talking about at the moment, we haven't seen anybody stretch out yet in terms of you know.

Mid term two three year type deals.

But certainly inquiries across all the segments.

It has picked up in the last couple of weeks.

Okay, and given that the short term charters really don't give you any protection or not much protection would you have to wait to see those kind of two or three year charters developing before you look into securing some ships.

Yeah.

I think with our views of market Magnus we we believe that volatility is here for a while.

Caused by the disruptions.

Russia's invasion, I think longer term, where we're positive on the market given where fleet supply is so.

Don't think you'll see us rushed and lock in a minute.

Mid term longer term charters I think we.

Where we're positioning the fleet to be more fully exposed to the spot market and I think we want to try and enjoy some of the volatility and maximize our earnings through that route.

Before we start thinking about locking in at this point.

Good.

Over here.

Thank you.

Thanks.

We'll take our next question from Kenn Hoekstra with Bank of America. Please go ahead.

Great Good morning, Kevin Sterling question.

So just I guess just looking at earnings all the way down to the bottom line right six negative quarters of earnings, but you posted positive EBITDA, what what's your breakeven now.

And maybe just an update on on the cost side of the equation. Obviously you gave us your thoughts on what's going on on the on market rates, but maybe just your thoughts on cost.

So take the first part of the question that you want to go with that so.

Yeah.

So kind of taking the first part of your question first our free cash flow breakeven.

Including Drydocking is about $15000 per day, so as long as were about 15000, a day on average through the fleet then we're in a position, where we're able to pay down to pay down debt.

I'm, sorry could you repeat the second part of your question. Please.

Yeah, just well breakeven was the first one and the second one was just maybe your thoughts on on costs right. So.

Whether it's faisel opex or your thoughts on the cost side. Just so we can think about if theres any anything actually you can do as rates start to scale here.

Yeah, I think the I think the cost that you've seen flowing through the income statement in the last couple of quarters and through Q1 are going to be relatively similar going forward. So on Opex I would say that our run rate will be about $39 million a quarter.

On G&A and the tenant and a half to $11 million per quarter, So and an interest in that sort of low $7 million range. So we're not expecting anything materially different over the through the remainder of the year on that front.

Helpful and Kevin just to clarify you said earlier, you still want to stay spot you're not at rates, yet where you want to start rolling in in unlocking in charters right I just want make sure I caught your your thought process there.

That's correct Yep Okay.

Then do you think you know you've done some sales in the past you your thoughts on any additional sales with <unk>.

Spot rates is there a certain level is there may be recognition of value that the market is not recognizing with where valuation is today that that you'd say, okay, well I can do that and it makes more sense for you know for the the equity holders.

Show them, where the market values are.

I think we look at sell and purchase deals.

On a standalone basis in each each deal is determinant in terms of what's the best value, we can generate for shareholders.

You know, obviously asset prices are high and you've seen us take advantage of that selling some of the older ships that we had that were due for drydocking and we've eliminated that expense and.

[noise] monetize those assets.

For what we've got left in the fleet I think at the moment given the volatility that we anticipate.

Over the next few months.

We certainly want to try and keep ourselves exposed to that so we're not actively looking to sell any additional ships at this point, but.

We always keep an eye on where asset values are going relative to where we think the forward state the spot curve is going to be and we make those decisions on as and when we see value to be generated.

Yeah.

And the you talked earlier about my last one just on the Russia Ukraine.

Shifting impacts of length of hauls.

Is there you know given your history is is there a.

I guess is this just what once this comes to a conclusion, how quickly things normalize based on your history or obviously it depends on what the world looks like what what's your thought on.

Historical look it at length of impact to rates.

I don't think anybody can predict how long this is going to take or or what the other side of this is going to look like.

I'll leave that to.

Great.

We just have to.

To keep looking at how things are changing day by day and adapting our.

Trading fleet to maximize our our revenue stream as and when opportunities arise.

I appreciate the thoughts thanks, yeah. Thanks Derek.

Thanks, Ken Scott.

We will take our next question from Chris Robertson with Jefferies. Please go ahead.

Hey, good morning, and thanks for taking my questions.

Hey, Chris.

Just to follow up on Ken's questions related to Opex and expenses can you talk about what if any cost pressures you are seeing this year, especially as it relates to rising oil prices and crew transfers.

Yes.

Certainly there are inflationary pressures, which are which are I guess coming to bear fruit for everybody at all industries at all companies.

Currently we haven't seen those really flowed through into our opex expenses in any material way and we will have to continue to monitor that and see how things change as you you've you've mentioned.

Aspartame, which certainly could end up increasing cost to some extent just depending on how inflation goes and then over the long term. Obviously, we have crew wages, which are our most that the most significant portion of our opex expenses, that's a bit of a longer term picture, but we'll have to see if inflationary pressures.

Have any impact there, but but overall I.

I guess in comparison to how we see the market developing over the next few years, given the outstanding supply side picture for tankers, where.

Quite comfortable on that front, we're not we're not too concerned about it but certainly there there could be some impact, but we haven't we haven't seen that start to flow through yet.

You also mentioned oil prices.

Obviously bunker prices are high and that's flowing through in our Opex, but our voyage economics and that is part of the picture of where our where our spot rates are obviously, we're having are experiencing periods of volatility that one where we've enjoyed some much stronger rates than in Q2.

Our fixed to date figures.

And notwithstanding the high oil prices. So hopefully the continued volatility allows us to have good returns on that front.

Okay, Yeah fair enough and then the higher oil prices aren't flowing through into higher lubricant costs and things like that.

Yeah.

At some point they will a lot of our we have a lube oil contracts and things in place. So you know overtime inflationary pressures will start to two to come in but if you look at lube oils I don't have the exact percentage in front of me, but if you look at lube oils as a percentage of our overall opex and the impact of inflation may have on that it wouldn't.

Anything material to our results certainly.

Okay great.

My second question totally unrelated but on the 13 vessels scheduled for Drydocking. This year can you kind of walk us through the the capex expense side of that.

Sure Yeah.

So in Q2, we're expecting about a $10 million related to both dry dock at the numbers I'll give you our both dry dock and BW T. S. A ballast water treatment system installations, so in Q2 expecting them.

$10 million.

In Q3.

Sorry that was four vessels for $10 million in Q3.

Six vessels and expecting about $12 5 million and then in Q4, one vessel at about a $3 million I should note that depending on the exact timing of dry docks, sometimes those those dates shift around a little bit, but that's approximately what we're what we're expecting to see overall, so about about 25 million.

<unk> dollars for the remaining three quarters of the year.

Alright, I appreciate that color and thank you for the time.

Youre welcome.

At this time, we have no further questions in the queue I would like to turn the conference back over to the company.

For any additional or closing remarks.

Okay.

Thank you for joining us all today and we look forward to speaking to you in three months time at our next quarterly earnings call.

Thanks for calling in.

Yeah.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

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