Q3 2022 Teekay Tankers Ltd Earnings Call
Welcome to Teekay tankers Ltd, 's third quarter 'twenty to 'twenty two earnings results conference call. During the call all participants will be in listen only mode.
George you will be invited to participate in the question answer session at that time. If you have a question 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 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 third 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 third quarter of 2022 earnings release and earnings presentation available on our web site.
I will now turn the call over to Kevin Mackay, Teekay tankers, president and CEO to begin.
Thank you Ed.
Hello, everyone and thank you very much for joining us today for Teekay tankers third quarter 2022 earnings conference call.
Joining me on the call today are Undrawn, Teekay tankers, CFO and Christian Waldegrave director of research.
Moving to our recent highlights on slide three of the presentation Teekay tankers generated total adjusted EBITDA of approximately $92 million in.
In the third quarter of 2022 and.
An increase of over $33 million or 57% from the second quarter of this year.
We reported an adjusted net income of nearly $58 million or $1 70 per share during the third quarter, an improvement from nearly $26 million.
Were <unk> 76 per share in the prior quarter.
Our improved results quarter over quarter, primarily due to higher spot tanker rates.
Okay.
In a counter seasonally strong market, we benefited from having 98% of our fleet in the spot market, which in turn enabled us to reduce our net debt to capitalization to 35% at the end of the quarter.
And to increase our liquidity to more than $250 million.
The strong charter market for mid sized tankers is being driven by both tanker market fundamentals and geopolitical factors.
Mid sized tanker voyages have maturity lengthened.
As a result of the conflict in Ukraine.
Driving up charter rates that are expected based strong Greg the winter months.
At the same time, the continued absence of new tanker orders means that we expect to see minimal or even negative fleet supply growth through 2025.
Turning to slide four we look at recent developments in the spot tanker market.
Spot tanker rates continued to firm during the third quarter.
Contrary to normal seasonal trends.
Average mid sized spot tanker rates were the highest for a third quarter since 2008 as shown by the chart on the left.
We strengthened rates was primarily due to a combination of the continued re routing with Russian oil exports from Europe to Asia, which is creating significant ton mile demand in the midsized segments as well as Europe pricing, Washington barrels with imports from more distant sources, including the U S Gulf Latin.
Ricker West Africa, and the Middle East.
I will give more detail on Russian trade flows and their impact on mid sized tanker demand later in the presentation.
Turning to slide five we provide a summary of our spot rates in the fourth quarter to date.
Fourth quarter to date rates have improved as we've moved into a seasonally stronger quarter.
Based on approximately 43% and 38% spot revenue days booked teekay tankers fourth quarter to date, Suezmax and Aframax bookings have averaged approximately $40000 per day, and a $36600 per day, respectively.
For our LR two fleet based on approximately 36% spot revenue days booked fourth quarter to date bookings have averaged approximately $44700 per day.
Overall these rates for approximately three times higher than last year's fourth quarter spot rates.
Turning to slide six we provide our expectations for the upcoming winter market.
As outlined previously the reshaping of oil trade flows following rushes invasion of Ukraine is increased mid sized spot tanker rates year to date.
However, the rerouting of Russian crude oil away from Europe is only partially complete.
As shown by the chart on the top left European seaborne imports of Russian crude oil has fallen just over $2 5 million barrels a day.
Started the year to around $1 5 million barrels per day by September .
However from December 5th these volumes are set to fall to zero as the EU ban on Russian crude oil imports spicy comes into effect.
Thus far these volumes had been replaced almost barrels for barrel by imports from the U S. Gulf Latin America West Africa, the Middle East as shown by the chart on the top right.
As Europe continues to reduce its imports of short haul Russian crude.
I will need to source additional replacement barrels.
Will come from much further away in terms of selling time.
As an example, a voyage from the Russian corporate Primark in the Baltic Sea to Rotterdam and northwest Europe is approximately four days in duration.
In comparison avoids from Houston to Rotterdam is approximately 17 days in duration.
Europe's replacement of Russian barrels from other sources is therefore, creating significantly longer voyages, thus more ton mile demand and is set to increase further once with full EU ban comes into effect.
At the same time, Russia is having to find new customers for the oil that is no longer being sold into Europe .
As shown by the chart on the bottom left most of this oil has been flowing to Asia in particular to India.
Again, this is significantly increasing ton mile demand due to the distances involved.
With the distance from <unk> to the West coast of India, being almost 7500 nautical miles or 26 days.
Looking ahead, we expect Russia will look to divert more barrels into Asia. Once the <unk> comes into full effect.
China could look increasingly to Russian imports as their import requirements grow.
The Chinese government recently issuing 15 million tons.
With new export quarters to their refineries for Q4 2022 as well as the first batch of crude import quotas for 2023.
The net impact of these trade flows.
As displayed on the chart on the bottom right shows the change in ton miles in January 2022, compared to September 2022 on these III trade routes.
As shown the loss in ton miles from Russian exports to Europe has been dwarfed by the combined positive ton mile impact of increased Russian exports to Asia and by Europe's replacement in Russian barrels from more distant sources.
This trend is set to continue in the coming months, which we believe will further drive mid sized tanker ton mile demand.
While the redrawing of global trade patterns as the largest single factor behind the current strength in rates. There are there reasons to be optimistic about tanker rates in the coming months.
Global oil demand is being boosted this winter by increased gas to oil switching, particularly in Europe due to the high cost of natural gas in.
In addition, we expect normal seasonal factors such as weather delays to add further volatility.
Partially offsetting these positive factors is the recent announcement from OPEC, plus a 2 million barrel per day.
Supply cut starting from November .
Many OPEC plus countries. However are already struggling to meet production targets, which means the actual cuts will likely be closer to 1 million barrels per day, most of which will come from the middle East.
This is expected to primarily impact the VLCC sector, rather than mid sized tankers and therefore, we did not see this as a significant negative factor for aframax and suezmax spot rates through the winter months.
Turning to slide seven.
We look at it positive tanker supply and demand fundamentals over the next two to three years, which we believe point towards the potential for a sustained tanker market strength.
Please supply fundamentals out to 2025 continue to look very positive with a lack of new tanker ordering is leading to a rapidly shrinking order book.
As shown by the chart on the left 2022 is on track to the lowest level of new tanker orders in 35 years with.
With a projection of around 6 million deadweight tons at the current pace of ordering.
This is highly unusual given the relative a strong spot tanker market in recent months as periods of stronger freight rates have in the past tended to result in an increase in new tanker orders.
However, very high new building prices, a lack of shipyard capacity through the end of 2025 due to high levels of containership and LNG carrier orders and uncertainty over vessel technology.
Deterred owners from ordering new tankers during the current upturn.
As a result, the order book when measured as a percentage of the existing fleet.
As falling to a record low of just over 4% as of October of this year.
Coupled with an ageing tanker fleet, we expect low fleet growth in 2023, and potentially negative fleet growth in 2024 and 2025.
Turning to the outlook for tanker demand and potential slowing of the global economy due to inflationary pressures and rising interest rates means that the outlook for 2023 has become more uncertain.
However, the major oily agencies are still forecasting a relatively robust oil demand growth next year.
Due to continued gas to oil switching and an expected post COVID-19 rebound and Asian oil demand, particularly in China.
Global oil demand is expected to grow by $1 8 million barrels per day in 2023 as per the average a forecast from the IEA EIA and OPEC.
Which would return demand to pre COVID-19 levels.
More importantly, the continued redistribution of Russian oil exports as outlined earlier in the presentation will drive average voyage distances higher spur increased ton mile demand.
As per Clarksons tanker ton mile demand is expected to grow by over 6% in 2023 and around five 5% in 2024.
Slipping stripping fleet supply growth of just under 1% and negative 1% respectively.
It should help tanker freight rates remained firm, albeit volatile over the next year and beyond.
I'll now turn the call over to Stewart to cover the financial slide.
Thanks, Kevin turning to slide eight we highlight the company's capacity for creating significant shareholder value.
Given our 49 vessel fleet and with almost all vessels trading in the spot market Teekay tankers continues to generate significant cash flow benefiting our shareholders by building further financial strength and rapidly increasing equity value through the repayment of debt as can be seen in the chart, our fleet wide free cash flow breakeven level, including.
Dry docking and other capital expenditures is approximately $15000 per day.
<unk> 5000 per day increase in spot rates above this level. The company is expected to generate approximately $85 million or $2 50 per share in annual free cash flow.
As we approach the seasonally stronger winter period, Teekay tankers is poised to continue strengthening its financial position and creating shareholder value as an illustration of the current fourth quarter to date rates, we would expect to generate free cash flow of approximately $12 50 per share in the next year, which equates to a free cash flow year.
<unk> of approximately 38%.
I'll now turn the call back to Kevin to conclude.
Thanks Kurt.
In summary, with a very limited number of Newbuild set to join the global fleet between now and 2025, we see significant structural support for the current strong spot market.
Right potential macroeconomic headwinds to oil demand.
On top of that the ton mile impact of Europe , turning away from Russian oil has proven to be sizable and appears to be long lasting.
And the forthcoming EU ban from early December is set to significantly increase that impact.
Mid sized tankers like those in the TNK fleet continued to be disproportionate beneficiaries of these supply chain shifts.
By positioning our fleet to trade spot, we're very heavily exposed to the current tanker market strength.
In our high operating leverage means a strong tanker market translate directly into tnk's free cash flow.
We continue to focus on reducing our leverage in a manner that we think is prudent.
<unk> as well to be successful over the long term.
With that operator, we're now available to take questions.
Thank you if you do wish to ask a question at this time again. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment again. It is star one to ask a question.
We can now take our first question from Omar <unk> of Jefferies. Please go ahead.
Hey, guys. Thank you good morning.
Kevin you went through the ton mile impact we've been seeing this year.
Due to the.
Evolving trade patterns as a result of the war your fleet, obviously being <unk>.
Focused exclusively on the Suez is an effort that's been in the sweet spot of being the most in demand as a result of all this I just wanted to ask with the band now coming into effect here starting in about a month's time.
What have you seen so far.
As a response ahead of that are you seeing anything thats, that's transpired differently here over the past few weeks.
What our charters doing from your vantage point and perhaps differently to prepare.
Doug.
<unk>.
Generally we haven't seen a material impact.
Up till now I think given the.
The duration of voyage is going into Europe , we probably wont see that for another maybe another week potentially another 10 days.
We are seeing heavier volume coming out of the U S Gulf and I think that's why.
You've seen us Gulf rates on offer micron has jumped to over $90000 a day.
Because of the disconnect between the number of ships available to move those cargos.
We're also seeing a growth in lighting imports sorry.
Sorry later in exports in the U S Gulf.
And shipping onto Vlccs, some of which will be going to Rotterdam. So I think that's the early sign of this ramp up in imports destined for Europe .
But beyond that we haven't yet seen.
A broad reaction across all different trade routes yet.
Okay. So presumably I guess the next few weeks, we will start to see the.
The impact of that.
Thanks for that Kevin.
It's also important to note that.
The U S is also just recently come out and given.
But of a stay of execution as we will acknowledging that there will be shipments are done prior to the ban coming into effect that might not be able to complete before the December 5th banner with extended those or the allowance for those legal voyages too.
To execute and deliver their barrels up until I think its the 19th of January So maybe thats potentially why we haven't seen the ramp up as early as maybe you expected.
Okay.
Okay. Thanks for that.
Very helpful.
And then just maybe just to shift gears here a bit obviously you guys over the past several years have been really focused on strengthening the balance sheet building liquidity and you've lowered the net debt to cap here into the low <unk>.
How do you think about I mean do you get this question a lot Tonight.
I guess I'll have to ask it but how do you think about your use of cash year for for the rest of the say this year.
Does that shift at all as to get into 'twenty three.
Deeper into 'twenty three any color you can give.
Yes.
Okay.
Yes, I think.
Fundamentally.
Said this several times over the last few years.
As management, we believes that that will create more long term value for shareholders by running the company from a position of real financial strength.
We've just recently experienced.
A fairly brutal almost two year downturn tanker market.
And we've only just starting to come out of that in the last quarter or two.
Which has been great. We've gained ground over the last couple of quarters on the inroads, we're making to reduce our financial leverage.
We're happy with the progress, we're making so far.
Our intention at this stage is to continue to really focus on paying down debt.
As we said on previous calls.
Okay, Alright, that's clear thanks, Kevin.
Thanks Omar.
We can now take our next question from Jon Chapell with Evercore. Please go ahead.
Thank you good morning, or good afternoon.
Kevin I'm going to ask that question a different way just based on some of the numbers. If I look at this slide that Stewart put out there.
The $12 50 of annualized free cash flow per share based on a fourth quarter to date numbers.
And layer that in with the slides that you presented that shows ton mile demand easily dwarfing.
Over the next couple of years that $12 50, a share and your share count.
Basically pay off your entire debt profile.
So maybe another way to ask it is what do you need to see before you shift gears back to what TNK was when it was formed 15 years ago with a more direct capital return based on the earnings profile of the company.
Well I think.
First of all it's about John .
Youre coming having been through the.
The last 15 years.
As a company you, obviously learn things and one of the things we've learned as a management team is.
Is that.
No.
Tanker industry that is highly cyclical.
It's prudent to to arrive at the market from a position of strength.
So.
The way we look at this we want to further strengthen our balance sheet to really meet three goals.
I think as Joe articulated this.
On the last earnings call.
Primarily we want to avoid any type of financial distress for the company as we move through a variety of tanker cycles.
And as you said the way, we're generating cash, which this market sustains at these levels.
That box will be ticked.
Fairly shortly here.
But beyond that we also want to have the capacity and the financial strength to act opportunistically. When we see good deals that add volume coming along and that could be the ability to take on more in charter exposure.
It could be looking at different technology additions it could be a variety of things including ship purchases.
And just to be able to act more.
Opportunistically.
Sort of trade or approach to.
To use our financial strength.
And then finally.
It's more of the structural strategic.
Leg that we're trying to fill on that is to have the financial strength to make.
Material investments in our fleet.
As we move through the cycles.
So yes, it's about paying down debt, but it's also about positioning the company financially to.
To give us the ability to look at a variety of opportunities in the future to drive long term shareholder volume.
Okay.
So let's follow up on that then with my follow up on renewal of the fleet by my Count.
75% of your fleet.
B at least 13 years of age as the calendar flips to 'twenty three.
Asset values are ripping right now.
How do you balance investing for the long term.
Given asset values that are kind of <unk>.
Become parabolic.
Versus modernizing our fleet that as you've de Levered.
Hey, just a bit probably more than you would have liked.
Well I think first of all let me let me make it clear I think we are very happy with where our fleet expands.
Today.
We're happy with the size of the fleet, we're happy with it.
Disposal that we have we're happy with.
The market really.
Anticipating going ahead so.
We're in a position where we're comfortable.
Over the long term, though.
Fleet renewal is definitely something that we will need to do and act on.
The acquisition timing and finding the right deals.
Is really crucial to being a successful tanker company.
I think you.
<unk> seen us.
Already started the process.
We've divested several ships.
2003 to 2000 built era.
Over the last 18 months.
Asset values have climbed.
So.
Selling off these older tonnages into this strong asset environment has begun.
We're bringing in a modern newbuild in January next year on a long term time charter basis at very attractive rates. So that's adding to some of the renewal.
In terms of new building.
And second hand values at the moment both.
We don't see.
<unk> pricing at the moment and we don't think that doing something now would add long term value.
Great.
As I said, we're comfortable we don't feel that.
Even with an average fleet age of 13 that it's something that we need to run out and do acquisitions for the sake of it no matter what the what the terms are.
So I think it's more around.
Building that financial strength building the balance sheet, so that when the opportunities do arise and we do see volume returning to some of these markets.
That we have the balance sheet to be able to act on it.
So I think it will require a bit of patience and.
Taking a moment.
Okay.
Thanks for the thoughts Kevin.
Thanks, Sean.
We can now take our next question from Kenn Hoekstra of Bank of America. Please go ahead.
Hey, great Good morning, Kevin Stewart and Christian <unk>.
Maybe talk a bit about.
The rates now.
In the forties.
You mentioned chartering in some vessels coming up.
Is there a chance you move to charter out and lock in these rates or do you still want to play as you mentioned, it's only been a few quarters that you've entered this upswing do you kind of wait this out a little bit longer maybe talk about a bit more about your philosophy there.
Sure Ken.
Ken.
We don't think our philosophy.
Changes in terms of chartering or indeed in chartering.
The numbers are obviously very different.
But I think our approach to the to the idea of the charter portfolio.
It doesn't change.
So at the moment.
As I said, we're extremely happy with the fact that 98% of our fleet is exposed to this market.
We're not in a hurry we think.
The winter market definitely has some more legs here.
But we are we are looking at opportunities that are out there and evaluate them against our forward years.
Haven't executed on anything as yet.
No it.
It doesn't imply that we're not turning over stones.
Having a look at what's out there.
And I think looking at our fleet size.
50 ships.
Exposure to this market, we have the capacity to put away.
A few ships and I think you'll probably see us do that at some point.
Over the winter and into 2023.
Various generations because.
It makes sense if you can lock in.
Some attractive numbers at high levels.
Having to do that work in the spot market.
I think it's something that we've always looked at something we will continue to look at and I think it.
That doesn't just mean, our chartering as well I think he will probably also see us look at potentially bringing more ships in.
If there is an ability for us to make a margin.
Youll see us do that as well.
Yes.
So I guess as we went through that he wanted to make sure. You were you were exposed to the spot now youre, saying as we go through the winter at these levels. Maybe there is room is there a percentage you.
Or you would want to maybe limit that to is it.
10, 25% of the fleet that you'd want to be to keep that spot exposure or.
The notes that are out there.
No. It is not we don't look at it formulated a lot of it adjusts.
Week over week month over month, as we see things developing in the market.
Geopolitical issues or fundamental issues around.
Tanker rates.
So it's not we don't go into the year into the winter with a fixed percentage in mind.
And we really just evaluate individual deals on a case by case basis.
Thanks, Tom So let me, let me ask a follow up on the <unk>.
On a different subject back to Russia.
Maybe just talk about you talked about what's left here.
Is there a point where you know.
You would start to get nervous of the unwind, if theres piece or how long that would take.
I guess I'm trying to understand how stable you think this new world order in an environment can be at least isn't.
Isn't at least the next year or two years, how long do you think the permanence of this setup as you you get these longer ton miles kind of <unk>.
Built into the network.
You're essentially asking me to read <unk> mind.
Yes.
In any environment.
<unk> like this obviously.
Award between two significant countries.
There is obviously not something we deal with all the time.
We have to like all participants in any industry, we have to.
I'm trying to understand where this might be going.
We can't project out that far.
System far out what we can look at the fundamentals that are underpinning our market.
No.
Those are very strong as I've articulated it in the presentation.
For now the.
Ton mile increase we think it's been durable now for eight months, we think that will be durable through.
Possibly definitely through the winter and possibly through the end of 'twenty three but you never know we can't guarantee that so.
<unk>.
You always have to keep an eye on developments and see and react accordingly.
Alright fair question to us.
That's helpful.
To answer that without question.
Maybe just one more if I can just the order book right is there are you seeing any I mean, given where rates are.
I get the structure I understand have been the order book is is there anything in the yards are doing to create spots to.
Are they looking at these rates and where they are and trying to open up spots or are you seeing any loosening of that or your peers going to place some new orders in at this point, maybe you could talk about if there's anything that could disrupt that part of the equation.
Yes, Hi, Ken.
Now in terms of shipyard capacity opening up we're not really seeing anything there. If you look at the order book I think for 2020 forward, it's pretty much set.
No spare capacity.
For 2025.
Still some capacity for <unk>.
Second half of the year.
<unk>.
Not so much of the big three Korean yards, but at some of the small to medium sized Korean yards in China, but it is not enough capacity that could sort of swamp the.
2025 order book and cause a material increase in tanker fleet growth.
Owners side.
It's quite remarkable given the charter rate with thing, we Havent had mustang.
<unk> tanker ordering at all.
You can look at this year, we've only had about 5 million deadweight of tanker relative.
Now you go back to 2015, which was a comparable year for tanker rates, we have 30 million deadweight of orders, so I think that kind of.
Triple problem of high new building prices not a lot of shipyard capacity.
Question for Labour vessel technology is deterring orders so for now we.
Don't see much red flags with regard to that 2025, a little bit we still think that it's going to be a very low year for tanker deliveries.
And.
Property negative fleet growth again in 2025.
Great Thanks, Chris and thanks to.
Kevin and I appreciate the time.
Thanks, Ken.
And we have no further questions at this time I would now like to hand, the call back to the company for closing remarks.
Thank you for joining us today, and we look forward to speaking to you in three months time.
Goodbye.
This concludes today's call. Thank you for your participation you may now disconnect.