Q2 2022 Teekay Tankers Ltd Earnings Call

Welcome to dicate ancherss limited second quarter 20- 20 to earning threeresults conference call. During the call, all participants will be in a lease, only Mote. Afterwards you will be invited to participate in a question and under possession at a time. If you have a question, participants will be asked to presstaar one to register for a question or system. During the call. This pressar zero on your dashstone phone as a reminder. This call is being recorded. Now for opening remarks. Any 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 W tk tankors com, where you will find a copy of the second quarter 2022 earnings presentation.

stwart 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 second quarter 2022 earnings release and earnings presentation available on our website. I'll now turn the call over to steuart and tk tankerers CFO to begin.

Thank you, Ed. Hello everyone and thank you very much for joining us today for tk tankers' second quarter 2022 earnings conference call. Joining me on the call today: our Christian mdegrave, our Director of research. The mickel sidein, Director of chartering and freight trading Kevin, is attending to a personal matter at the moment but sends his best for today. I'll be leaing the call.

Moving to our recent highlights on Slide 3, the presentation. T K tankers generated total adjusted EBITDA for 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 two $26 million, or 76 cents per share, during the second quarter and improvement from an adjusted net loss of $14 million, or 41 cents per share, in the prior quarter. Our improved results quarter-over-quarter, were primarily due to higher spot tanker rates in the improving tanker market environment, which I will address shortly. T K 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 weakk 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 midsized tankers.

Volatility in the market has been pronounced in continuous driving average rates higher. With 98% of our fleet trading in the spot market, we are well positioned to maximize results in the strengthening tanker market environment.

At the same time is important to underscore that the current situation is not just a story about rus, sian Ukraine or about the medium term. The outlook for midsized tankers is positive through at least the medium term, based upon robust underplying underlying supply and demand fundamentals.

Finally I would point out that we entered into an agreement to sell a 2005 built afformax in July for approximately $25 million, reflecting the recent appreciation in asset values and allowing us to crystalze an $8 million gain. We have also in chtered, now for max for $23 thousand per day for two years, allowing us to maintain our exposure to the spot market.

Turning to Slide 4, 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. encouraginglyl, the troughs in the tanker rates over the past few months have generally been higher than the peak seene in 2021, which indicates that the market has turned to corner and that midsized tanker fleet utilization is reaching levels 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 voiceed distances in the midsize sectors due to changing trade patterns.

This strength has continued into the early part of Q3 as the impact on tonunmile 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 5, we provide a summary of our spot rates in the third quarter to date.

In the third quarter, based on approximately thirthousand-three percent and thirthousand-seven percent of spot revenue days booked tk tankers- third quarter to D su as Max and araax, bookings have averaged approximately twent thousand-nine thousand 600 per day and thirthousand-five thousand 600 per day respectively. For our lr twoth fleet, based on approximately thirthousand-seven percent of spot revenue days booked third quarter. Today, bookings have averaged approximately thirthousand-five thousand $400 per day.

The third quarter is often 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 X higher than the rates in the third quarter of 2021.

Turning to Slide 6, we look at tanker tmile demand improvements since the start of the year.

Tanker trade patterns changed significantly since the start of 2022, benefiting both afax and suzmax tankers.

shorthaul exports of Russian crude oil to Europe have fallen by around seven thousand barrels per day compared to preinvasion levels, with the Russian crude oil increasingly being diverted to destinations East of suz, particularly to India and China, which is increasing midsized tanker ton mile demand.

In order to fulfill its crude oil requirements, the erope is having to replace shor-haul Russian barrels with imports from other regions, most notably from the? U's Gulf, Latin America, West Africa and the middle East. These changes are primarily benefiting affrraax and suzmax 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 2020. -two and.

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 asuzmax, or approximately 20 days from the? U's goul on an afrox, that is obviously helpful for ton mile demand. Similarly, when China imports oiled from the Baltic on afroaxis, which we have seen recently, it is another example of increased tonmile demand due to changing trade patterns.

Turning to Slide 5- that part of me. Turning to Slide 7, we look at the positive tanker supply and demand fundamentals over the next two to three years which we believe point toward a more stain tanker market recovery.

Strong tanker demand growth is projected in both 2022 and 2023 due to rising oil consumption as the world adapts to the COVID-19 pandemic and a corresponding increase in oil supply, which in 2023 is primarily expected to come growth in non-opec volumes.

This is further supplemented by rising vodages distances due to changing trade patterns, as outlined in the previous Slide.

As per estimates from clarkson,'s midsized taner demand is projected to grow by approximately 7% in 2022 and by a 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 historical low levels of tanker orders, a rapidly shrinking order book and an aging global tanker fleet.

Only two point one 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 vlcs or suzmax orders placed since June 2021 and only a small number of afroax orders placed. As a result, the order book as a percentage of the existing fleet as fallen just 5%, 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 containership and 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 two point zero two four million and 25, as removals of older ships are expected to outweigh new deliveries into the global tanker fleet.

Turning to Slide 8, we highlight some of the company's key financial metrics.

While the fundamentals of the tanker market have been improving for some time, the current strength and charter rates have been fairly recent, following almost a two -year coa-driven- coer-driven market downturn.

However because of our high operating leverage, with 49 vessels currently trading in the spot market, we are already generating significant cash flow in this higher rate environment.

As shown on the Graft on the left, our fleetwide free cash flow breakeven level, including dry doc and other capital expenditures, is less than $16 thousand per day.

With 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% and.

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 midsized tank per market in both the short-term and in the coming years. Our 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, Ladies and gentlemen. Once again, if you would like to ask a question, Please spe no bypassing Star one on your touchedone phone. If you are using a speaker phone, Please make sure your mute function is still otoal or your seninor to reach our equipment again, press star one to ask a question. Because just for a moment to assemble the queue.

With the gofirst question from John Chapel we'd ever call your lines open. Please go ahead.

Thank you, good morning.

I joh.

Stewart. On that 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. What's the level that you want to get to, whether it's net Deb to, you know, balance sheet cap or, you know to, E? bit.da?

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 the tk tankers resuming kind of capital return?

John ? Yes, a good question. So if you look at the, the chart on Page J, you can see that in 2000 twent 20 we were done to, and that debtto cap in the low 30 and factthat's the end of 2000: 20, idtwo thousand and 20 we were probablyking about about 30%. I would say that our first work that we have ahead of us to get our leverage age levels down to, to those kind of back kind of level- said there's a lot of different metricsts that we could use. You know, using debt to cap us is probably as good as. So I would say the first step is to try getdown to our 2000 20 levels, that in the 30% zone, and then we can then will start thinking about other other uses of capital. And you know, part of part of that is looking at the long term and and our needs for pleaet renewal, the ability, docked opportunistically on opportunities as they come down, as they come down the pike, to be aggressive within charters. If you know the market presents those opportunities. So we have a magic number that we're trying to get to. We do think ultimately the financial strength is the best way for us to create value for shareholders. And you know, as we saw in the recent two years, even though our leverleverage was play low in 2000, y we a good job in reducing ageintwo thousand and y we'-re we in the of the tanker market' already ina position where you know the concept of liquidity and leverage levels where 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 downam a shareholder value.

Okay and makes sense. And then from the opportunistic standpoint- I mean you're still filling olderships and you still have a few legacy in your fleet asset values- that's certainly inflected. So I think no one would fall you 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, do you? Do you have to be more disciplined when you think about? You know, adding more modern tonnage at these prices, especially before you get, may be a true inflection in in the, in the earnings of the cash flow.

Yes So I mean I guess first of all maybe talk a little bit about our fleet. So we've got 50 vessels right now, 49 of them. What spot rate exposure are? You know? You've seen in our percentage fix, in our 2: two results. Our vessels are doing very well and atingon 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 there we're almost ideally positions in this period of this period of what we expect to be a strong tanker market. But of course we do have to have eye forward on fleet renewal as well and I you know the word to use there I think is important and that's disciplined and- 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 for any tanker market. Of course, on a portfolio basis we could bring some, some shifps in- you know the 50 tanker fleet- if we added a fewvessels. That different points in the cycle. That can still be be the right thing to do. But I wouldn't expect, you know, significant acquisitions at the top of the market from us and and I think in the meantime will just enjoying what we, what we hope will be strong cash flows from from the existing fleet and deation.

Okay that makes sense. one more, if I may, for Christian. The Slide six is great. Lays out pretty simply the trade flows and I think you know we're not even kind of there yet because sanctions haven't truly kicked in yet. But as we look at these new trade routes that you've laid out here, obviously the midsiz crudecarriers have been direct beneficiaries and immediate beneficiaries of some of the new trading routes. At some point that the vlc's start to benefit as well, either from you know the impact of sanctions or from just cannibalization of some of the midsized routes.

Yeah I, like you pointed out, I think the benefit that we've seen so far have really been on the midside because of the regions impacted. So you obviously these con trade into the Baltic or into the black seed. So where we've seen changing trade pattern and stuff going long, the all it'sreally's really help the midso, as you pointed out, the V? C have been lagging and I think that's more a se of obviously Chinese than import demand have slowed down or did slowdown in Q2've Co a lotckdown and I think with a a strongly back RO dated or market that we've had in recent months as well, it kind of disincentiervizes the longhaul movement from the Atlantic into the Pacific and I think both of those, the sort of slowly changing, I think Chinese demand is starting to come up again now it we not necessarily being reflected in higher importort yet, but I think as China continues to recover from coed and demand increases through the balance of this year and into next year, I certainly Sing will start to see more volues lowing into China which is uractually the the C? C trade. And then also, as you look further ahead, you know there's not a ton of SP supply capacity. You know whether allalso supplied going to come online, increasing over the next for the total to 18 months is going to be Atlantic basase and there's going to be more? U's production and exports, more F B ville and guyana. And so again, if if we start to see some more of those long haul barrels moving again, then that worldall again for the kickststart the C market. So and much all of these will really you know the beneficiies that the changing trade pattern, a Re LT of Russia, but I do think as China ES back and we've started to see those haul moments again that will bring up the V rates and then you know, if we have a healthy C market's going to help the rest of the tanker market as up.

I'll make sense. Thanks so much, Christian. Thanks Stuart.

Thank joonn.

Thank you. We take our next question from all minopta which are Re. Your line is open is go ahead.

Thank you guys, just wanted to.

Follow up on John's sort of line of questioning regarding the, the fleet and countryroial renewals and the leverage storyre. You mentioned that back,' the gap being around 39% and trying to get it to where you were before I run that 30% level. It does feel like we're we're on that path here and you may be able to shoot that before year end. But also maybe, just judging maybe from your body language or a from be at the audio, it does sound like maybe you aren't it to pull a trigger on anything just yet. Is there something else beyond just the leverage ratio?

That you're looking at. That's going to indicate whether you're ready to start the next wave of tk tankers life cycle.

Yes mar, and back to the column for working with jeffre, So good to good to talk to. You know that's a good question. And and clearly we look at more than just a 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, our view on how much cash flow will be making in the four years, look at the opportunities that we think may be presenting themselves to us in terms of where asset ues would be and when we might want to inest. We also look at the our fleet profile and look at fleet renewal. 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 Bill tankers. We're not big sellers of tankers of the moment. Obviously we sold 1, we ag to sell one during the quarter for almost $25 million to a very firm price and a lotof sense. And we we brought in a time charter to balance that off, to keep our market exposure. But you know, So 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, is you vest, the question you. The first line is that we want to make sure, or do our best to make sure, we're not 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 that's raising capital with expensive rates or divesting of assets, that we ther not divest that at lower levels. Then the next line, I supposeed, is to make sure that we have the capital lot hand to be opportunistic and and do deals what they present themselves if we think that they add shareholder value. And then I guess the third one ultimately, is to be able to act countercyclically to make investments that at the best, best time. And we look at all of those things in trying to judge how much, how much leverage we think we should carry and how much prior power we should have. So definitely, one of our eyes is looking forward toward eventual fleet renewal and judging how much capital we need to to think about having in order to do that as well. In the meantime, a highlighted on the slide with our free cash flow yield every, every dollar of cash flow that we generate above that brea kekeep, the level goes to creating that which preate sharehold valuue. So we are. We see that paying down debt is a way to create shareholder value. We think that creates value and in the enterprise- and you know, ultimately hopefully is share as a cash flows increase across the tanker market. The equity markets will also recognize that and hopefully start to reort companies in the space.

Thank you. Let's very, very well set in detail and agree with you. Definitely, paying down debt is there's nothing wrong with that and I guess just todo.

Just to what you mentioned about the aftermax that you sold. I guess that's pretty much it. You think at this point, if you were to characterize tk tankers going forward, it's not really a seller, it's kind of, at this point, harvesting existing fleet.

Yes I would say that primarily harvesting the existing lead is where we're focused. But, to be honest, before we So that tank Ard wouldn't have characterize this as sellers either. But depending on the position of the vessel, it's particular characteristics and what a buyer is looking for, opportunities can perpresentend themselves that that are compelling. So again, in this case, we did what we consider to be a really great trade, which is we sold the tanker that had about three years of trading life, but extremely firm rate, and we brought in a two -year time, a two -year time charter, to kind of replace those spot days. 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 of 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.

We talk about tnk, investors ask about dividend potential and, if I'm just hearing you right, and dividends obviously would be nice, and I think John mentioned the good old days. Be great obviously, to have a dividend policy, but it sounds like your first and foremost strengthen the balance sheet.

But you've got an eye-haning 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. You know, we could be in a in a run here, multiyear run, which sees very firm rates, high cash flows and high asset values for a sustained period of time. Or, you know, some of the things that we've just discussed in terms of macro risk could come to bear which could mean we have know greatade cash flows for a year or two and then the market gets softer for something thatwe haven't seen or you know an unforeseen events. So I don't getin position. It's the TER marketi don't want to get in the itionof 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 and in terms of capital allocation, in our forard view of the market, and we'll continue to try and make the decisions that we think will ultimately add the most shareholder value. But Re we're not sort of dogmaticin our view of how it needs to be done. We need to be dynamic and kind of monitor the market. And our fourth view.

Got it understood. Thanks for the time.

Great Thanks so much.

Thank you. As a reminder, Ladies and gentlemen, please press tau one to ask the question. tau one to ask the question. With the ordnext question from kencostter with Bank of America, your line is open.

greay, good morning to art and save trave to Kevin what. What gets you at this point to consider moving to charters from from spot? Is that something tk will? We'll look at if. If rates start to to get to certain levels, are there levels you would would talk about and maybe talk about how negotiations are going with customers?

Yes So there is magic level. So whenever we're looking at time chartering vessels out and in, for that matter, we look at our our, the overall portfolio, how much spot rate exposure we have and our forward view of the market and and look, we look for opportunities where perhaps we can lock in rates that our higher than either higher than where we see the forward market being, or that are compelling in relation to where we see that forward marketbeing. We're just happy to have a hedge edge in place, that sort of guarantees of 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 to see windows opportunity. So, while the spot market has as moved up, the actual charter that we entered into recently was an in charter $23 thousand a day, which we think is compelling and ad value. As you saw, the last time market spike, which was more of an event driven spike, back in twentthousand 20, we were quite active in putting shits out that we we thought it was that was 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 after for max, us to maxs. Right now in the two to three year periods there's not a lot of liquidity in that market. There's sort of a a small trickle of vessel that are that are being put on the market and being and being charterred. 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 a certain number of vessels. But again, that will be relative to our forward do and, as we outlined in the presentation, we feel really good about the market heading into two 20 three 20, four and 20 five, based on the fundamentals.

Is there a point where Stewart, you and Kevin say we still always want to be at least on 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 on how much you need to keep spot exposed or if rates get to you know, I don't get your number- 50 thousand a day, you'd say you know know, I've got a' I'm good to lock that in an extended period time.

Yes So I think pract, you know, first of all, just practically speaking, with 50 vessels and 49 of them spot, at the moment there are limitations on the amount of vessels that you can put out on time charter. There's only certain amount of liquidity in that market. So even if we thought we were to point in the market where we'd want to be aggressive and put vessels out, you know, I think it would be unlikely we'd 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, continue to have healthy spot rate exposure and then we'll try to supplement that value with how we position ourselves on in and outcharters.

Well that's great to put a parameter there. What about the, 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 game, maybe just thought thoughts on on the. Maybe some more thoughts on the sale.

Yeah I mean, I think first and foremost, the asset market has moved up. So when we talk to you three months ago versus now, asset values of MO moved up considerably across AF MA's, who has max 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 characteristic of that vessel, the buyer, where the vessel was positioned when we could deliver, 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 is really quite firm and you know people are paying a quite, quite high prices for, for maged in older tonnage. But I think think that really speaks that people's confidence in the underlying spot market and how much cash flow they're 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 it's uniqueto us. I think a lot of people are seeing that and I think it's having the the knock on effect on asset values.

Great and last one for me. Stories on the.

I guess, given the backdrop on the global economy, more on the the container side versus everything on on your side of the table are there. Are you know in your discussions, are you see any yard fluctuations in terms of availability of openings where you could see more product or crude kind of tankers there, or is it really firm and and you know that that F is really the true number and you're not going to see kind of slots opening for build capabilities?

Christian do you want to take that one in terms of the current order book?

Yes sure, I think we're not seeing anything in terms of container orddeers sailing or yard spots opening up. Certainly, if you look at the chart we put on, slides have in the shipyard are pretty full through halfway through y-five, maybe even through to the end of twoy-five, and certainly sunship y are taking energy orders through 2026. you may be able to find a few bir still late in 25 But I don't think it's going to be massive amoun. So we're pretty confidence bill that the tanker of delivery scheduled in 2000 andy-five we's going tobe very low. I think we will be in 2000 and twenty-four as well. So we really don't see an opportunity to really ordered tank is in scale until 2000 and twenty six gives us a bit of runway in terms of some confidence on the very lfully growth expectations over the next two tothree years.

Great stuff. Great great set up stwart Christian. Thank you very much for the time appreciate.

Thanks Ken.

Thank you.

It reappears the hno further question at this time I would like to turn the call back to your host for any additional 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.