Q4 2022 Teekay Corp Earnings Call
Please standby were about to begin.
Welcome to Teekay tankers Ltd's fourth quarter 2022 earnings results conference call. During the call I'll Park, all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session.
At that time, if you have a question participants will be asked to press star One to register for a question or.
Or 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.
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 fourth quarter and annual 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 fourth quarter and annual 2022 earnings release.
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 Ed.
Hello, everyone and thank you very much for joining us today for Teekay tankers fourth quarter and annual 2022 earnings conference call.
Joining me on the call today are Andrew 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 net income of $147 5 million or $4 33 per share up significantly from a strong third quarter adjusted net income of $57 9 million or $1 76 per share.
To put this in context, it is teekay tankers highest ever quarterly adjusted net income.
We have given notice to exercise purchase options on nine vessels currently in sale leaseback arrangements for a total of $164 million.
Related to this we have also signed a term sheet to refinance 19 vessels under a $350 million revolving credit facility.
By taking these actions will eliminate some of our more expensive debt, thereby reducing our already competitive fleet breakeven when we will improve our ability to optimize our balance sheet on an ongoing basis.
We expect to complete the facility by the second quarter of 2023.
With 51 vessels or 96% of our fleet operating in the spot market. We have high operating leverage that has served us well in this very strong market.
To illustrate that point, we generated $4 84 of free cash flow per share in the fourth quarter alone. This equates to more than a 50% annualized free cash flow yield based on our closing share price yesterday.
As a guideline for every $5000 increase in rates above $15000 free cash flow breakeven level, we expect to generate approximately <unk> 65 per quarter or $2 60 per year of free cash flow per share.
I would also highlight that we generated $20 million in free cash flow during the quarter from our four in chartered vessels.
In the tanker market spot rates have been very strong through the fourth quarter and first quarter to date with Aframax and Suezmax Max rates outperforming all other tanker sectors as the mid sized segment has been the primary beneficiaries of increased ton mile demand from the EU ban on Washington crude oil imports.
Even after the imposition of the price cap mechanism Russian crude oil export volumes have remained strong with exports in January at an eight month high.
Additionally, early indications are that the rapid reopening of China should support global oil demand growth in 2023, which should ensure that tanker demand remained at robust levels.
Finally, the order book for New tankers remains at record lows and should see negligible additional deliveries through at least the second half of 2025 due to limited available shipyard capacity.
A period of very low fleet growth over the next two to three years, coupled with firm levels of demand growth point to a continued strong tanker market over the medium term.
Turning to slide four we look at recent developments in the spot tanker market.
Spot tanker rates significantly improved over the winter months with the company recording its highest ever rates for a fourth quarter since our IPO in 2007.
This strength was driven by a mixture with positive demand fundamentals and seasonal factors, including longer voyage distances.
The rush to book cargoes ahead of the implementation of the price cap in the EU ban on Russian crude oil imports, which came into effect on December 5th.
An increase in Chinese crude oil imports.
And whether it relates to vessel delays in key regions.
Aframax and suezmax rates averaged significantly higher than other tanker asset classes in Q4, including Vlccs as shown by the chart on the right.
This strength has carried into the first quarter of 2023, and we anticipate another very strong quarter for spot rates.
Turning to slide five we provide a summary of our spot rates in the first quarter to date.
Average first quarter to date rates in particular, driven by Aframax sized vessels.
Improved further from the very strong levels of the fourth quarter base.
Based on approximately 69% and 57% of revenue days booked teekay tankers first quarter to date, Suezmax and Aframax size vessel bookings have averaged approximately $50600 per day and $67600 per day, respectively.
For those who regularly participate in our quarterly calls you will notice that we have decided to combine our aframax LR twos into a single reporting category, which we believe brings the presentation more in line with how we.
Think of and utilize these assets.
Importantly, I would highlight that we have doubled the size of our in charter portfolio to eight ships, having welcomed an additional four ships between late Q4 and early Q1 this year.
Of these one is a new eco newbuild eco aframax, which is chartered in <unk>.
$18700 per day for seven years with multi one year extension options thereafter.
These eight vessels are currently chartered it for an average of $24300 per day with a mark to market value of approximately $60 million.
When we have conviction on the market. These in charters give us the ability to quickly and materially increase our operating leverage beyond what we get from our own fleet and that dynamic is currently playing out.
Turning to slide six we look at changing crude tanker trade patterns over the past 12 months and they have benefited mid sized tankers over other asset classes.
Russia is an invasion of retrain in February 2022 has led to a substantial redrawing of global oil trade routes short haul movements of crude oil from Russia to Europe declined during the course of 2022, culminating in the total bond of Russian seaborne crude ex doors.
<unk> from December 5th.
Most of the crude oil rich Russia was previously exporting short haul to Europe is now moving long haul primarily to India, and China, which has benefited the midsize sectors given the main Russian load ports in the Baltic.
The black sea and that Kozmino in the far east are inaccessible to Vlccs.
This led to a 39% increase in mid sized tanker ton mile demand from Russian crude oil exports during the year stretching the fleet and increasing tanker fleet utilization.
While teekay tankers has not participated in the movement of Russian cargoes. The transfer of ships into so called Shadow fleet effectively removes them from mainstream trades and reduces effective vessel supply.
In addition, Europe has been replacing Russian barrels with imports from further afield, including the U S. Gulf.
Latin America, West Africa, and the Middle East.
90% of the crude oil was Europe imported during 2022 was on Aframax and Suezmax tankers and the lengthening of voyages resulted in a 12% increase to mid sized tanker ton mile demand.
The net result of these changes is that global Aframax demand increased by 12, 6% last year, while suezmax demand increased by 10, 7% far higher than demand growth and other tanker asset classes.
We think that these trade pattern changes are durable representing.
Representing a step change in demand rather than a short term spike.
On the mid sized crude tanker trade routes will continue to be stretched in.
In 2023, which will help support strong spot tanker rates in the midsize segment.
Turning to slide seven we look at the outlook for oil demand.
The IEA expects global oil demand to grow by 2 million barrels per day this year, taking oil demand above pre COVID-19 levels.
For the first time.
Almost half of this growth is expected to come from China with demand accelerating from the second quarter onwards, as the country opens up after three years of strict COVID-19 lockdowns.
This will help offset slightly weaker demand growth in the OECD nations due to economic headwinds as a result of high inflation and rising interest rates.
Another key element of oil demand growth in 2023 will be the continued resurgence of international air travel.
Estimates the jet fuel demand will grow by around $1 1 million barrels per day this year to $7 2 million barrels per day.
Bringing demand back to pre COVID-19 levels.
This will provide a boost to crude oil demand as refiners look to increase throughput in order to keep the market well supplied.
With global demand recovers the world will need more oil.
This will partially be met by higher non OPEC production, which is projected to grow by $1 8 million barrels per day. This year led by the United States, Brazil, Norway and Guyana.
With the majority of oil demand growth expected to come from Asia. This should lead to an increase in long haul movements.
West to east during the year, which should be positive for crude tanker ton mile demand.
The OPEC plus group has pledged to keep its current supply cuts in place through the end of the year. However by the second half of the year the projected call on OPEC plus rises to about 1 million barrels per day above current production levels, suggesting that an increase in production could be merited.
Finally, Russia recently announced that we will cut crude oil production by half a million barrels per day during March.
We believe that this cut as lately due to a reduction in refinery throughput.
<unk> refinery product exports, while crude oil exports are anticipated to remain at current levels.
Turning to slide eight we look at the positive tanker supply and demand fundamentals over the next two to three years, which we believe point toward the potential for sustained tanker market strengths.
As of February 2023, Global tanker order book when measured as a percentage of the existing fleet has fallen to a record low of less than 4%.
This is reflected in the tanker deliveries scheduled as shown by the chart on the left with.
With a historically low number of tankers scheduled to deliver over the next two to three years.
The pace of new vessel ordering remains very low with just 8 million deadweight tons of new tanker orders placed in 2022, which was the lowest since the mid 19 nineties.
At the beginning of $2023 has seen a slight uptick in activity was around 8% to 10 LR two orders being placed in recent weeks.
However, there is little scope to meaningfully add to 2025 order book shipyards are largely full through the second half of 2025 due to the record amount of containership and LNG carrier orders placed over the past two years.
We project the global tanker fleet will grow by around one 5% this year with virtually no growth in 2024.
In comparison tanker ton mile growth is set to remain at very healthy levels over the same timeframe.
Projected firm levels of oil demand growth, particularly from China, and the continued stretching of the midsized tanker fleet due to changing trade patterns.
As such we believe the tanker market has the potential to remain very firm over the medium term.
I will now turn the call over to Stewart to cover the financial slide.
Thanks, Kevin turning to slide nine we highlight the company's high operating leverage and what that means for kincaid capacity to generate cash flow and create shareholder value in a strong tanker market.
Throughout 2022, our focus has been on strengthening our financial position and creating equity value for TNK shareholders generating three.
$318 million of free cash flow in 2022 enabled us to reduce our net debt by 41% to $345 million.
Bringing our net debt to cap down to 24% at the end of 2022 importantly, this cash flow increased tnk's equity value, thereby creating value for our shareholders.
We have 51 vessels or 96% of our fleet trading in a very strong spot market that is supported by solid fundamentals positioning TNK to continue generating significant free cash flow.
As can be seen in the chart, our fleet wide free cash flow breakeven level, including Drydocking and other capital expenditures is approximately $15000 per day.
Every $5000 per day increase in spot rates above this level. The company is expected to generate approximately $90 million or $2 60 per share in annual free cash flow.
While this is not a projection of future rates to illustrate this point the fourth quarter spot rates were to be sustained throughout 2023, we would expect to generate approximately $20 per share of free cash flow for an annualized free cash flow yield of over 50% based on our closing share price yesterday.
It is important to also consider the role of our in charter portfolio, which is having a material impact on our earnings beyond that of our owned fleet. Historically, we've taken advantage of opportunities to increase our exposure to promising spot markets by expanding our in charter portfolio. For example, when we last significantly increased our in charters in anticipation of.
A strong spot market in 2015, our 11 in charter tankers generated $44 million of incremental free cash flow in just one year.
There is a similar dynamic playing out now for our in chartered vessels generated $20 million of incremental free cash flow in the fourth quarter alone and our current eight tanker in charter portfolio has a mark to market value of approximately $60 million.
I will now turn the call back to Kevin to conclude.
Thanks Stuart.
In summary, the spot market for mid size tankers has remained exceptionally strong and the combination of structural shifts in the global crude flows a record low order book, but it is essentially caps through the medium term and multiple drivers of demand growth.
Conditions supportive of a strong market for some time, even in the face of potential macroeconomic headwinds.
The positive ton mile impact related to Europe's ban on Russian crude imports are durable and have accrued disproportionately to mid sized tankers.
And rates for both Aframax and Suezmax rates have outperformed all other vessel classes in recent months.
In line with our stated priority. Our 2022 focus has been on balance sheet strength and the sharp improvement in the spot market in the second half of the year enabled us to significantly strengthen our balance sheet.
Moving into 2023, our operating leverage puts TNK and are positioned to continue generating a great deal of free cash flow and a strong tanker market.
While continuing to build financial capacity the company will need for future fleet reinvestment. The additional cash generation allows for a broader range of options to be considered in our capital allocation planning for the year.
As with all of our decisions, we will continue to be guided by discipline and the goal of creating long term shareholder value.
Okay.
With that operator, we're now available to take questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
My Speaker phone. Please make sure your mute function is turned off.
Chocolate in it.
Once again press star one to ask a question, we'll pause for just a moment.
An opportunity to signal for questions.
And we'll go first to Jon Chappell with Evercore ISI.
Thank you good morning.
Good afternoon, Stuart I want to start.
With the debt side of things a couple of announcements here and I just wanted some clarification. So bear with me, it's a multi parter, but hopefully pretty simple these nine sale and leasebacks as at the end of them.
Then the $3 50 that youre, hoping to draw on this new facility in the second quarter, obviously significantly more than the 164 are you using that to pay your existing.
Non sale leaseback facilities and then the final part of that is what's the savings.
From the $3 50 that youre, drawing down in the second quarter to what you would be used to pay down.
Those proceeds.
Yes, Thanks, John Good afternoon, So yes, theres a few there are few moving parts here. So let me try and kind of walk through it. So first of all as you mentioned were.
Have given notice to exercise <unk> sale leaseback purchase options will be repurchasing those in March with with cash on hand.
To that however, we are putting in place a new $350 million debt facility.
That revolver will ultimately finance 19 vessels. So in addition to the nine vessels that we have already given notice that it will be giving notice on another 10 vessels this quarter.
<unk>.
Four of those late in the year, but the rest of the rest of them by the end of Q2 and joining that sale leaseback facility. So.
14 vessels will be approximately 15 vessels will be done in Q2 four vessels in Q4, all of them going into that $350 million facility at the end of that we'll only have eight sale leasebacks remaining so.
And in terms of the savings it really depends on the spot market how much cash we generate the two areas of savings from do it for making this change one is we're at a lower cost of borrowing and the second one is it allows for more efficient cash management by being able to have a revolver, which we can kind of use dynamically. So overall, where we are.
We're expecting about $8 million in savings on a run rate basis per year, but that really will depend on how much cash we generate.
Okay that helps I was looking for the spread on the current rates versus the new one and I figured it would be much lower in this environment when its balance sheet.
Kevin Your last point on capital allocation and things are happening really quickly here the fourth quarter was amazing the first quarter, even better if I just look at this chart you put on on slide nine and not even having to extrapolate beyond.
Whatever 40 days from now that first quarter to date average rate free.
Free cash flow equivalent per quarter year net debt at $3 45 would be cut by more than half just by March 31.
What's the timing on the potential shift in its capital allocation.
This is.
<unk>.
Something we've asked in the past I know, it's something we've been talking about for years now the heavy lifting on the balance sheet is done.
Our nominal position your operating Leverages is incredibly strong.
But you do kind of stand out as one of the very few tanker companies that haven't started the capital return machine and arguably you are in the best position to do it out of any of them.
So what do we think about the timing and the magnitude here.
Sure John It's a good that's a good question.
Yes.
Talk about 2022 first as you said things have moved very quickly and Q4 was fantastic.
Fantastic quarter, certainly better than our initial expectations going into it.
So that really allowed us to close off what we've been saying all last year, which was our our focus and our challenge channeling of our.
Cash generation would go to paying down debt and strengthen the balance sheet. So we're really pleased with the way we've been able to close off our 2022 plan.
We now need to look at 2023, and we started the year off extremely well even better on the Aframax is in Q4 so.
The debt is coming down very quickly.
And we do recognize that in this position with this level of cash generation and we look forward views that the market should remain strong maybe perhaps not at these levels, but certainly strong throughout the year.
That does afford us optionality other than just looking at balance sheet strength.
So as we sit down with our board.
We will be talking about 2023, and what we do with the cash.
Part of that discussion will be around.
The third leg or the third phase that I think <unk> spoken about on the previous call last year about building that financial capacity.
To be able to do some significant fleet renewal when the opportunity arises.
But I think we also can can talk about other options.
So that is certainly something that we plan to do.
Yeah.
Okay just out of curiosity, then ill move on the when is the next board meeting.
Our next board meeting in March.
Okay great.
Thanks for the time, Kevin Thanks Stuart.
Thanks, Jonathan.
We'll go next to Ken <unk> with Bank of America.
Hey, Kevin Hi, this is Nathan dialing in for Ken.
Just wanted to get a.
<unk>.
A bit more color on how.
The team has seen the macro environment.
As well as spot market here, we noticed that.
There were some simultaneous charter any further out or the fourth quarter.
Earning a very decent spreads.
Would you mind, maybe talking a little bit about the availability of these opportunities and what your view is on.
Future charter.
Opportunities. Thanks.
Hi, Nathan.
I think we will.
Covered a lot of ground in our.
Our prepared remarks in our presentation, just about the macro environment.
I think one of the things that has really missed in articles in general view on the tanker market.
Yes.
Our view on the clean space and there's a few on the crude space.
It's a lot more nuanced than that and we're trying to highlight that within the crude space. The real beneficiaries of the macro developments that we've seen in 2022 and what we expect to continue in 2023 is that the midsize Aframax and Suezmax is are the real beneficiaries of that.
<unk> gross net that is why we feel that.
The durability of those fundamentals.
Are there.
And this isn't the spikes that we're seeing.
Seasonal or arm.
Yeah.
Short term sanctioned and sort of related there are far more durable or not which is what's giving us a bit more confidence as we look forward.
In terms of our in and out charter it's.
One of those.
Tools in our toolkit that we have used very well in the past.
As we gain confidence in the markets ability to generate income.
We are willing to go out and take positions on vessels with owners that we have good relationships with are making maybe looking for a bit more security as rates move up.
And we can take those vessels.
And trade within our program.
And make a very healthy margin.
Obviously as the spot market creeps up the time charter market also starts to creep up in tandem.
And as we look at managing the.
The risk reward if you will.
We do look at hedge.
Hedging some of the positions that we've taken.
So for example, we took in the ship.
Earlier this year.
About $30000 a day on automatic we flipped it out at $48000 a day. So we're looking at a spread over the first year, which pays down the asset.
And gives us a cheap vessel going into the second year with an option to extend it for a third year. So that's kind of how we look at how we play the in and out charter in a market like this.
But it's certainly something that.
We have done in the past to good use.
Stuart mentioned and in the final slide.
Our mark to market on these charters.
If the market stays strong could.
Could add another $60 million to to a war chest.
Got it that's helpful and just as a follow up.
There were some brief mentions.
Uh huh.
About the emergence of a look at the.
Fleet following the December 5th on price the price cap on Russia seaborne exports could you maybe talk a little bit about the magnitude of that and.
And how it's affecting the capacity and scrapping from your purview.
Alright.
The illicit fleet as you call it generally.
We tend to call it the Shadow fleet.
The vessels that are owned by one off companies in various parts around the world The Middle East China for example.
And they trade Russian oil or are they carry Russian oil from exports out of Russian ports into mainly China.
In India.
In terms of scale and size I know on the Aframax is theres roughly about 150.
Aframax is in that trade.
The tracking services.
Have listed I think on.
The Suezmax has its about 70.
Remember, maybe Christian has a more accurate number but.
This is significant size.
Our fleet is servicing.
Servicing that.
Not trade.
The good thing is that those ships are being pulled out of the regular trades that companies like Teekay tankers are willing to participate in and Thats why youre seeing the spikes that we're getting.
And we had in the fourth quarter.
And we're enjoying now in the first quarter as well.
Great. Thanks, Kevin and then congrats again on a great quarter.
Thanks Nathan.
We'll go next to Omar Doctor with Jefferies.
Thank you Hi, Kevin Hi, Stuart.
I wanted to just follow up on John's line of questions.
Obviously things have been much stronger than anticipated and they're happening very quickly.
We're on pace to get into a I would say a net cash position here in the not so distant future.
Which really does kind of cap it.
<unk> closes the book on your years long Guy would say efforts.
Reduce debt.
And from your comments.
It sounds like here in 'twenty, three you're preparing to shift capital allocation.
Youre going to be sitting with your board potentially as soon as March as John asked I.
I guess, maybe you, Kevin and sort of as management.
Am I reading correctly that your preference in terms of shifting that capital allocation is towards renewing the fleet versus paying out dividend.
No I wouldnt categorize that.
At all I think I think we have to be realistic.
Teekay like any ship owning company has assets with finite lives.
And.
As we generate income we have to be prudent about it.
Reserving.
Some of our of our earnings to invest in and renewing our fleet and renewing our business.
But.
We're fully aware that our capital allocation strategy.
Planned.
Which we do talk to our board about every every meeting.
<unk>.
Can include other other options and as we continue to generate the levels of cash flow that we've seen in the fourth quarter and year. So far in the first quarter. It does give us the options to look at.
Other avenues.
We are fully aware that we have shareholders that.
Do light capital return.
And there is various forms of doing that so it allows for a very healthy <unk>.
<unk> robust discussion with the board about what the best approach is.
But we're not fixed.
It has to go in one direction or another.
It's sitting everything on the table and as we look at the forward view of our market and as that market develops some changes.
Is looking at how we how we think the best to deploy that capital.
The benefit of shareholders over the long term.
Yes, thanks for that Kevin Thats, very Thats fair and clear.
And can we can be sort of expect maybe a.
A broad sort of action plan coming out of say this March meeting.
I don't know if we should be thinking too much of this upcoming board meeting, but generally speaking should we be thinking here in the next couple of months, maybe that teekay tankers will be announcing.
Our new plan of action.
No I think what you can expect is that the.
Management will be having as we do.
Robust conversations with our board all of our meetings.
Don't read into.
<unk> Board meeting coming up.
The decisions when they are made we'll be we'll communicate them.
As we did last year, when we spoke to the market and we were.
Clear that we were channeling our cash generation towards debt repayment.
If that changes we will we will communicate that once that decision is made but I don't want to preempt the conversation with discussion with the board or what decision they.
They and us together.
Landon.
Yes.
Completely understand that.
And then maybe just as a.
Kind of thinking about a fleet renewal because it is important.
As you highlight.
Have you given it some thought as to how does that fleet renewal look.
For you going forward, how do you go about I mean, obviously the balance sheet and just about in Tiptop shape as it can be how do you think about fleet renewal from here Whats the avenue of going younger.
Are you thinking about that.
I think.
As always it is going to be a combination of.
Different elements, whether it's going into the secondhand market and doing.
A series of transactions or whether it's placing newbuild orders or as we've done in the past, where we would do on block transactions on a larger scale.
It could be all of those it could be one of those.
It really comes down to the opportunities that develop over time.
Our expectations for the returns.
With any given investment opportunity. So we keep a very open mind, we're agnostic to how we go about it but it really is it ended the day.
Have to provide.
Good returns and a good investment.
So that we can drive value for shareholders.
Got it yes.
Thanks, Kevin and then one final one and I'll turn it over you did mentioned in your opening comments just the separate topic. The Aframax LR twos on a blended together as you report the average rates.
Just want to make sure that I know in the past.
<unk> focused a lot of the LR twos on the Dirty trade is that basically how it is going forward.
Effectively now.
<unk> you have are trading in the crude market.
Currently and going forward.
Well, we have we have nine owned LR twos on.
On past calls.
I think.
The fleet to risk trade or the LR twos, we're trading in the clean market, we've increased it to three.
That has subsequently dropped as the Cleveland <unk> two market dropped awesome and crude stayed high.
Yeah.
We can.
Converted.
Ships into the crude side, so we're down to one pure clean LR two at the moment.
I think I've described this before we really look at the <unk> two is a fungible asset and we trade it.
On a voyage by voyage basis. So there is some of our LR twos that are currently dirty.
We're keeping an eye on where potentially cleaning up as the.
The DLR to start to Spike again here.
But in terms of.
The fleet, we don't separate the two units out we trade it as one fleet and that's why we've changed the way we report it.
Okay.
I see okay. So that natural relationship will continue to exist.
Okay, well, great well, thanks for answering my questions and congrats on the record quarter.
Thank you.
Thanks, Omar I appreciate it.
And at this time there are no further questions I will turn the call back to management.
Thank you for calling in and we look forward to speaking to you in the future.
Okay.