Q2 2022 Teekay Corp Earnings Call
Welcome to Teekay tankers limited second quarter.
Two earnings results conference call.
During the call all participants will be in a listen only mode.
Afterwards, you will be invited to participate in a question and answer session at.
At this time, if you have a question participants will be asked to press star One to register for a question.
Assistance during the call. Please press star zero on your Touchtone important 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 would like to direct all participants to our website at www Dot Teekay tankers Dot com, where you will find a copy of the second quarter of 2022 earnings presentation.
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 our 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 second quarter of 2022 earnings release and earnings presentation available on our website I will now turn the call over to Stewart Andrade Teekay tankers CFO to begin.
Thank you Ed Hello, everyone and thank you very much for joining us today for Teekay tankers second quarter 2022 earnings Conference call. Joining me on the call today are Christian Waldegrave director of research the nickel side Lynn <unk> director of chartering in freight trading Kevin is attending to a personal matter at the moment, but sends his best for today I'll be leading the call.
Moving to our recent highlights on slide three of the presentation Teekay tankers generated total adjusted EBITDA of approximately $58 million in the second quarter of 2022, an increase of approximately $41 million from the first quarter of 2022, we reported an adjusted net income of nearly $26 million or <unk> 76.
Per share during the second quarter, an improvement from an adjusted net loss of $14 million or <unk> 41 per share in the prior quarter of improved results quarter over quarter were primarily due to higher spot tanker rates.
And the improving tanker market environment, which I will address shortly teekay tankers is benefiting from our high operating leverage with 49 vessels currently trading in the spot market. This is enabling us to strengthen our balance sheet. After weathering almost two years of a weak tanker market, both our liquidity and our balance sheet leverage are moving in the right direction.
And that remains a key focus for us.
Oil supply chain disruptions related to Russia's invasion of Ukraine are proving to be durable with new oil supply chains now established and marked by significantly longer average voyages, particularly for mid sized tankers volte.
Volatility in the market has been pronounced and continuous driving average rates higher with 98% of our fleet trading in the spot market, we are well positioned to maximize results and the strengthening tanker market environment.
At the same time it is important to underscore that the current situation is not just a story about Russia, and Ukraine or about the immediate term.
Look for mid sized tankers is positive through at least the medium term based upon robust underlying underlying supply and demand fundamentals.
Finally, I would point out that we entered into an agreement to sell a 2005 built aframax in July for approximately $25 million.
Reflecting the recent appreciation in asset values, and allowing us to crystallize and $8 million gain. We are also in chartered now for Max for $23000 per day for two years, allowing us to maintain our exposure to the spot market.
Turning to slide four we look at recent developments in the spot tanker market.
As shown by the chart spot tanker rate volatility has increased.
Since March with rates in the second quarter of 2022, averaging significantly higher both quarter on quarter and year on year encouragingly. The troughs in the tanker rates over the past few months have generally been higher than the peak seen in 2021, which indicates that the market has turned the corner and that midsized tanker fleet utilization is reaching.
<unk> not seen on a sustained basis since mid 2020.
The increase in spot tanker rates since February has been due to a combination of limited fleet growth and longer voyage distances in the midsized sectors due to changing trade patterns.
This strength has continued into the early part of Q3 as the impact on ton mile demand. Following Russia's invasion of Ukraine appears to be durable I will talk about this in more detail later in the presentation.
Turning to slide five we provide a summary of our spot rates in the third quarter to date.
In the third quarter based on approximately 43% and 37% of spot revenue days booked teekay tankers third quarter to date, Suezmax and Aframax bookings have averaged approximately 29600 per day and 35600 per day, respectively for our LR two fleet based on approximately 37% of spot.
Revenue days booked third quarter to date bookings have averaged approximately $35400 per day.
The third quarter is often a weaker due to seasonal factors, but thus far this quarter. The market has remained strong across our core vessel classes to put this in context, while rates achieved in the quarter to date have meaningfully improved compared to a good second quarter. There are actually three to five times higher than the rates in the third quarter of 2020.
One.
Turning to slide six we look at tanker ton mile demand improvements since the start of the year.
Tanker trade patterns have changed significantly since the start of 2022 benefiting both aframax and Suezmax tankers.
Short haul exports of Russian crude oil to Europe have fallen by around 700000 barrels per day compared to pre invasion levels with the Russian crude oil increasingly being diverted to destinations east of Suez, particularly to India, and China, which is increasing mid sized tanker ton mile demand.
In order to fulfill its crude oil requirements Europe , because having to replace short haul Russian barrels with imports from other regions, most notably from the U S Gulf Latin America, West Africa, and the Middle East. These.
These changes are primarily benefiting aframax and suezmax tankers due to the load and discharge regions involved.
These trade pattern changes are likely to be long lasting with the EU planning to phase out all Russian seaborne crude oil imports by the end of 2022.
Simply put when oil imported into Europe previously came five days from the Baltic and now comes approximately 20 days from the Middle East on a suezmax or approximately 20 days from the U S. Gulf on an Aframax that is obviously helpful for ton mile demand. Similarly.
Similarly, when China imports oil from the Baltic on Aframax is which we've seen recently it is another example of increased ton mile demand due to changing trade patterns.
Turning to slide five pardon me turning to slide seven we look at the positive tanker supply and demand fundamentals over the next two to three years, which we believe point toward a more sustained tanker market recovery.
Strong tanker demand growth is projected in both 2022 and 2023 due to rising oil consumption as the world adapt to the COVID-19, pandemic and a corresponding increase in oil supply, which in 2023 is primarily expected to come from growth in non OPEC volumes.
This is further supplemented by rising voyage distances due to changing trade patterns as outlined in the previous slide.
As per estimates from Clarksons mid size tanker demand is projected to grow by approximately 7% in 2022 and by further 5% in 2023, which would far outstrip projected fleet growth of around 3% and zero percent in the same years.
Looking further ahead the outlook for tanker fleet supply continues to be very positive driven by historical historic low levels of tanker orders are rapidly shrinking order book and an aging global tanker fleet.
Only $2 1 million deadweight tons of tanker orders were placed in the first half of 2022, which is the lowest total for a six month period since at least 1996. Furthermore, most of this ordering has been for small tankers with no vlccs or Suezmax orders placed since June 2021, and only a small number of aframax orders placed.
As a result of the order book as a percentage of the existing fleet has fallen to just five 2%, which is a record low.
We expect the level of new tanker orders will remain low in the near term due to high new building prices a lack of yard space through the end of 2025 due to high levels of container ship, an LNG carrier orders and continuing uncertainty over vessel technology.
With the diminished order book and an aging fleet, we expect zero tanker fleet growth in 2023 and negative tanker fleet growth in 2024, and 2025 as removals of older ships are expected to outweigh new deliveries into the global tanker fleet.
Turning to slide eight we highlight some of the company's key financial metrics.
While the fundamentals of the tanker market has been improving for some time the current strength in charter rates has been fairly recent following almost a two year COVID-19 driven.
Pardon me Covid driven market downturn.
This breakeven and our significant operating leverage at spot rates, we booked in the second quarter and those we have booked in the third quarter to date, our annualized free cash flow generation is substantial in fact at Q3 to date levels, our free cash flow yield would be on the order of 31%.
As mentioned in my earlier remarks, the company intends to use the increased cash flow to further reduce balance sheet leverage we are already starting to make progress in that regard. After two years of a weak market. Our focus is on getting our balance sheet to a very strong place that will support our business and our ability to be opportunistic throughout the tanker cycles.
In the meantime, and notwithstanding some of the macro risks in the background and the volatility that we expect to persist we are optimistic about the mid sized tanker market in both the short term and in the coming years are midsized fleet spot market exposure and trading orientation puts us in a great position to do well in a strong market.
With that operator, we are now available to take questions.
Thank you.
And gentlemen, once again, if you would like to ask the question by pressing star one on your attach to important if you're using a speaker phone. Please make sure. Your mute function is turned off to allow youll see net to reach our equipment again press star one to ask a question.
Just for a moment to assemble the queue.
We take off with a question from Jon Chappell with Evercore. Your line is open. Please go ahead.
Thank you good morning.
Morning, John .
Stuart on the last slide you just walk through I mean, you've been able to really deleverage the balance sheet through a very difficult market given some of the initiatives you put in place 2019, even before the pandemic and now you have this accelerating free cash flow.
The level that you want to get too whether it's net debt.
Our balance sheet cap or.
To EBITDA.
How much more do you need to do based on what you see in the market today to kind of pivot a little bit more to some of those opportunistic.
Things you spoke about or back to the good old days of Teekay tankers.
Zooming kind of capital return.
Hi, John Yes, good question.
If you look at the chart on page eight you can see that in 2020, we were down two and net debt to cap in the low thirties and in fact at the end of 2020 mid 2020, we were probably about about 30%.
So I would say that our first work that we have ahead of us is to get our leverage levels down to those kind of that kind of level.
As you said there was a lot of different metrics that we could use but using net debt to cap is probably as good as any so.
So I would say the first step is to try and get down to our 2020 levels Thats in the 30% Zone and then we can then we'll start thinking about.
Other uses of capital and part of it part of that is is looking at the long term and our needs for fleet renewal.
The ability to act opportunistically on opportunities as they come down as they come down the pike to be aggressive within charters.
The market presents those opportunities so.
We don't have a magic number that we're trying to get to we do think ultimately that financial strength is the best way for us to.
Create value for shareholders and.
As we saw in the recent two years, even though our leverage was quite low in 2020 or we have done a good job in reducing leverage in 2020, where we ended the rest of the tanker market, we're already in a position where.
The concept of liquidity and leverage levels, where it had come to be a concern again. So so we know in the tanker market there can be that cyclicality and we want to make sure that that our strong financial position make sure that we're always in a position to take advantage of opportunities as opposed to taking steps that could damage shareholder value.
Okay.
And then from the opportunistic standpoint, I mean, you are still selling older ships and we still have a few legacy in your fleet asset values are certainly and collected so I think no one would quality for that.
But how do you kind of a line.
Modernizing the fleet through more modern assets again, when the asset values are starting to run away I mean did you.
Do you have to be more disciplined when you think about.
Adding more modern tonnage at these prices, especially before you get to maybe a true inflection in the in the earnings of the cash flow.
Yes, So I guess first of all maybe talk a little bit about our fleet. So we've got 50 vessels right now 49 of them with spot rate exposure.
As you've seen in our percentage fixed in our Q2 results our vessels are doing very well and generating on the cash flow. So we really like our fleet and from a perspective of the amount of capital that we have invested relative to the cash flow that they can generate we think the world almost ideally positioned in this period.
In this period of.
What we expect to be a strong tanker market, but of course, we do have to have our eyes forward on on fleet renewal as well.
The word you used there I think is important and that discipline and we do want to be disciplined about how we look at fleet renewal.
Making significant number of acquisitions at the top of the market is a dangerous thing to do for any tanker market of course on a portfolio basis, we could bring some some shifts in.
The 50 tanker fleet, if we added a few vessels at different points in the cycle that can still be the right thing to do but I wouldn't expect significant acquisitions at the top of the market from us and I think in the meantime, we will just be a enjoying what we what we hope will be strong cash flows from the from the existing fleet and being <unk>.
Asian.
Okay that makes sense and one more if I may for Christian the slide six is great.
Lays out pretty simply the trade flows.
And I think we're not even there yet because sanctions have been truly kicked in yet, but as we look at the new trade routes that you've laid out here obviously, the mid sized crude carriers have been direct beneficiaries and immediate beneficiaries of some of the new trading routes at some point that the vlccs start to benefit as well either.
The.
Fact of sanctions or from just cannibalization of some of the midsized routes.
Yes, Hi, Dan like you've pointed out I think the benefit that we've seen so far have really been on the mid size because of the regions impacted.
Obviously these concentrated into the Baltic.
And the Black Sea.
We've seen changing trade patterns and stuff getting longer haul, it's really it's really help the mid size.
As you pointed out the vlccs have been lagging and I think that's more of a sites are all obviously Chinese import demand slowed down or slow down in Q2 with Covid lockdowns.
I think with the.
Ah strongly backward dated oil market than we've had in recent months, while it kind of Disincentivize us.
The long haul movements from the Atlantic into the Pacific.
But I think both of those are sort of slowly changing I think Chinese demand is starting to come up again.
Not necessarily being reflected in hiring pulse yet.
But I think as China continues to recover from Covid.
Demand increases through the balance of this year into next year I said, we think we'll start to see more volumes into China, which is naturally VLCC trade.
And then also if you look further ahead.
A ton of that.
Supply capacity it takes away the oil supply is going to come online increasingly over the next sort of 12 to 18 months is going to be Atlantic based and theres going to be more U S production and exports more phones Boonville and Guyana.
And so again.
If we start to see some more of those long haul barrels moving again, then that will again sort of kick start the VLCC market.
And we'll show that vehicle will really be a big.
Big beneficiaries of the changing trade patterns as a result of Russia, but I do think as China comes back and we start to see those long haul movements again that will bring up the V rates and then if we have a very healthy VLCC market, it's going to help the rest of the tanker market is up.
Uh-huh I'll.
Makes sense. Thanks, so much Christian thanks Stuart.
Thanks, John .
Thank you we take our next question from Omar Saad with Jefferies. Your line is open. Please go ahead.
Thank you Hey, guys just wanted to.
And follow up on John's sort of line of questioning regarding the.
The fleet potential renewals.
Our leverage Stuart you mentioned.
Debt to cap being around 39%, but I'm trying to get it to where we were before I run that 30% level. It does feel like where we're at.
On that path here.
<unk> be able to achieve that before year end, but also maybe just judging maybe.
Maybe from your body language.
From via the audio it does sound like maybe you aren't itching to pull the trigger on anything just yet is there something else beyond just the leverage ratio.
That.
Youre looking at that as kind of indicate whether you are ready to start the next.
Wave of Teekay tankers lifecycle.
Yeah, Hi, Omar.
Welcome back to the column for working with Jefferies. So good to talk to you yes.
Yes.
That's a good question and clearly we look at more than just the leverage number and trying to decide how we're going to gauge capital allocation.
We look at the tanker market, how long we think the cycle will last.
View on how much cash flow will be making and the forward years.
Look at the opportunities that we think may be presenting themselves to us.
In terms of where asset values would be and when we might want to invest and we also look at the our fleet profile and look at fleet renewals. So as you've seen over the last couple of years, we have been selling some of our older tankers sort of 2003 to 2005 built tankers were not big sellers of tankers at the moment, obviously, we sold one.
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We agreed to sell one during the quarter for almost $25 million, which was a very firm pricing and made a lot of sense and we brought in the time charter to balance that off to keep our market exposure.
But.
We're looking at all of those factors and trying to decide where we think our leverage should be and again, maybe just walking through it as you've asked the question.
First line is that we want to make sure or do our best to make sure. We're not in a position where if the market does turn or whenever the market turns that we're not needing to take actions that harm shareholder value, whether thats raising capital at expensive rates or divesting of assets that we'd rather not divest that at lower levels and then the next line I suppose is to make sure that we have the capital.
It had to be opportunistic and and do deals when they present themselves. If we think that that they will add shareholder value and then I guess the third what ultimately is to be able to act counter cyclically to make investments at the best time, and we look at all of those things and trying to judge how much how.
How much leverage we think we should carry on how much firepower, we should have.
Definitely one of our eyes looking forward toward eventual fleet renewal and judging how much capital we need to think about having in order to do that as well in the meantime, as highlighted on the slide with our free cash flow yield.
Every every dollar of cash flow that we generate above that breakeven level goes to creating NAV, which creates shareholder value. So we are we see that paying down debt is a way to create shareholder value. We think that creates value in the enterprise and ultimately hopefully as sure as our cash flow has increased across the <unk>.
<unk> market.
The equity markets will also recognize that and hopefully start to reward companies in this space.
Thank you.
That's very very well set in detail and agree with you definitely paying down debt as.
There's nothing wrong with that.
And I guess just just what.
What you mentioned about the Aframax that you sold I guess, that's pretty much. It you think at this point if you were to characterize teekay tankers going forward, it's not really a seller.
At this point harvesting.
Listing fleet.
Yes, I would say that primarily harvesting the existing fleet is where we're focused but to be honest before we sold that tanker I wouldn't characterize this as sellers either.
Depending on the position of the vessel is particular characteristics and what a buyer is looking for opportunities can present themselves that are compelling. So again in this case, we did what we considered to be a really great trade, which is we sold the tanker that had about three years of trading life at extremely firm rate and we brought in a two year time, two year time charter to kind of replay.
Those spot days, so we find ourselves sort of net net not in a materially different position from our exposure to the spot market, but with being able to crystallize a very firm value. So so I would say that we're not sellers at the moment, but we're always looking for opportunities to add value through doing different sorts of trades.
Okay. Thank you and maybe just one final follow up a lot of a lot of times when.
We talk about TNK investors ask about dividend potential and if im just hearing you right.
Dividends, obviously would be nice and I think John mentioned, the good old days.
Great obviously to have a dividend policy, but it sounds like you are first and foremost strengthen the balance sheet.
So you've got an IDE ensing and modernizing the fleet that is.
Modernizing the fleet once you get to that point, where you're ready to now deploy capital differently, it's really about.
Strengthening the fleet profile and then after you've done that it's return capital to shareholders.
Well I don't I don't want to sort of predict what the future will hold we could be in the run here a multiyear run which sees very firm rates high cash flows and high asset values for a sustained period of time.
Or some of the things that we've just discussed in terms of macro risks could come to bear which could mean, we have great cash flows for a year or two and then the market gets softer for something that we haven't seen or an unforeseen event. So I don't want to get in a position as the tanker market I don't want to get into a position of predicting the future what I would say is that.
For the time being we want to reduce our debt levels.
We're considering all the things I mentioned earlier in terms of capital allocation and our forward view of the market and we will continue to try and make the decisions that we think will ultimately add the most shareholder value, but we're not sort of dogmatic and our view of how it needs to be done we need to be dynamic in and kind of monitor the market and our forward view.
Got it understood.
Thanks for the time.
Great. Thanks Omar.
Thank you as a reminder, ladies and gentlemen, please press star one to ask the question. Paul One last question, we'll take over next question from Ken <unk> Bank of America. Your line is open.
Great Good morning Stuart.
And safe travels to Kevin.
What gets you at this point to consider moving to charters from from spot is that something Teekay will look at if rates start to get to certain levels are there levels you would talk about.
And maybe talk about how negotiations are going with customers.
Yes so.
There isn't a magic level. So whenever we're looking at time chartering vessels out and in for that matter.
We look at our overall portfolio, how much spot rate exposure, we have and our forward view of the market and and look when we look for opportunities where perhaps we can lock in rates that are high.
Higher than either higher than where we see the forward market being or that are compelling in relation to where we see that foreign market being where we're just happy to have a hedge and hedge in place that sort of guarantees or some cash flows and it's the same on the other side within chartering vessels.
Looking for opportunities, where we think we may be able to see windows of opportunity. So.
While the spot market has moved up the actual charter that we entered into recently was an in charter at $23000 a day, which we think is compelling and add value.
As you saw the last time the market spiked, which was more of an event driven spike back in 2020, we were quite active in putting ships out, but we thought it was a that was a compelling opportunity. So we'll keep our eye on the time charter market.
At the moment I would say that it's the rates are continually stepping up for Aframax and Suezmax is right now in the two to three year periods.
Theres not a lot of liquidity in that market. There is sort of a small trickle of vessels that are that are being put on the market and being in being chartered so not a lot of liquidity right now, but we will keep our eye on that and if those rates continue to move up I would expect that at some point, we would lock in a certain number of vessels, but again that will be relative to our forward view.
And as we outlined in the presentation, we feel really good about the market heading into 'twenty three 'twenty four 'twenty five based on the fundamentals.
Is there a point, where Stuart you and Kevin said.
We still always wanted to be at least I don't know 50, 30% exposed to the spot market because that's who we are now given we've played the other game in the past is there a new philosophy.
How much you need to keep spot exposed or if rates get to.
Pick your number 50000, a day you'd say no I've got it.
I am good to lock that in for an extended period of time.
Yes, so I think practice first of all just practically speaking with 50 vessels.
49 of them spot at the moment there are limitations on the amount of vessels that you can put out on time charter theres only a certain amount of liquidity in that market. So even if we thought we were at a point in the market, where we'd want to be aggressive and put vessels out.
I think it would be unlikely we would be able to put out more than half. The fleet just to choose just to choose a number. So I think TNK will continue to have a healthy will continue to have healthy spot rate exposure.
And then we will try to supplement and add value with with how we position ourselves on in and out charters.
That's great, but put a parameter there.
What about the asset sale you mentioned on the 2005 vessel was that specific to the vessel age was it.
Something about the vessel was it just being opportunistic as you mentioned $25 million gain maybe just thought thoughts on.
Maybe some more thoughts on the sale.
Yes, I mean, I think first and foremost the asset market has moved up so when we talked to you three months ago versus now asset values have moved up considerably across aframax and suezmax segments for sure. So I would say the underlying thing there is just that we have a firming market.
For that particular sale I think it's just a matter of the characteristics of that vessel the buyer, where the vessel was positioned when we could deliver it and it all sort of came together with that with quite a firm firm number but I think the big the Big story. There really is that the asset market has moved up and there are really quite.
Really quite firm.
People are paying are quite quite high prices for four.
Mid aged and older tonnage, but I think that really speaks to people's confidence in the underlying spot market and how much cash flow they are going to be able to generate.
What we've walked through on today's call in terms of our outlook for the market I don't think its unique to US I think a lot of people are seeing that and I think it's having the knock on effect on asset values.
Great.
Last one for me.
On the.
I guess given the backdrop on the global economy more on the container side.
Versus everything on your side of the table or there are when Youre discussions are you seeing any yard fluctuations in terms of availability of openings, where you could see more product or crude.
Tankers, there or is it really firm and.
That is really the true number and youre not going to see kind of slots.
Slots opening for build capabilities.
Christian do you want to take that one in terms of the the <unk>.
Yes, so I think we're not seeing anything in terms of container orders sailing or yards, but let's say opening up suddenly if you look at the chart. We put on slide seven the shipyards are pretty full.
Half way through 25, maybe even through to the end of 'twenty five and certainly some shipyards are taking LNG orders through 2026.
You may be able to find the fever still late in 75, but I don't think it's going to be massive amounts that were pretty confident still that.
The delivery schedule in 2025, it's going to be very low I think it will be in 2024 as well. So we really didn't see an opportunity to really all of the tank has been scale until 2026. So it gives us a bit of runway in terms of.
Some confidence on the very low fleet growth expectations over the next two to three years.
Okay, great stuff, great great setup Stuart Christian Thank you very much for the time appreciate it.
Thanks, Ken.
Okay. Thanks.
Thank you.
It appears there are no further question at this time I would like to turn the call back to your hosts for any additional or closing comments.
Thank you for joining us today, and we look forward to speaking with you again next quarter.
And this concludes today's call. Thank you for your participation you may now disconnect.