Teekay Tankers Ltd. Teekay Corporation Q1 2023 Earnings Call
Speaker 2: Please stand by. We're about to begin.
Speaker 2: Welcome to TK Tanker's LTD's first quarter 2023 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.
Speaker 2: At that time, if you have a question, participants will be asked to press star 1 to register for a question. For assistance during the call, please press star 0 on your touch tone phone. As a reminder, this call is being recorded. Now for opening remarks and introductions.
Speaker 2: I would like to turn the call over to the company. Please go ahead.
Speaker 3: Before we begin, I would like to direct all participants to our website at www.dktankers.com where you'll find a copy of the first quarter of the 2023 earnings presentation. Kevin N. Stewart will review this presentation during today's conference call.
Speaker 3: 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.
Speaker 3: Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter of 2023 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Makai, TK Tankers President and CEO to begin.
Speaker 4: Thank you, Ed. Hello, everyone, and thank you very much for joining us today for TK Tankers first quarter of 2023 earnings conference call. Joining me on the call today are Stuart Woldegrave, TK Tankers CFO , and Christian Woldegrave, our Director of Research.
Speaker 4: Moving to our recent highlights on slide 3 of the presentation, TK Tankers generated total adjusted EBITDA of approximately $206 million in the first quarter, an increase of approximately $26 million in the fourth quarter of 2022.
Speaker 4: We reported our highest ever quarterly adjusted net income of nearly $175 million, or $5.13 per share, an increase from a record fourth quarter of 2022 adjusted net income of approximately $148 million, or $4.33 per share.
Speaker 4: Our strong results have enabled us to reduce our net debt by almost 50% since last quarter to $182 million.
Speaker 4: We've also finalised a revolving credit facility for up to $350 million to refinance 19 vessels as we continue to exercise purchase options on vessels in sale leaseback arrangements.
Speaker 4: With strong four quarter spot rates and high operational leverage, TK tankers generated almost $194 million of free cash flow, including approximately $19 million from our eight tailwinds on 22nd Hygienic Average.
Speaker 4: As previously mentioned, for every $5,000 above our free cash flow break-even of approximately $15,000 per day, we expect to generate $2.64 in free cash per share annually.
Speaker 4: Given the substantial progress the company has made in building financial strengths and how well we are positioned to benefit in the strong tanker market, TK Tankers has transitioned to a counter-allocation approach under which our existing focus on financial strength and disciplined future fleet reinvestments is
Speaker 4: is supplemented by returning capital to shareholders.
Speaker 4: Namely, from this quarter we have initiated a fixed quarterly dividend of 25 cents per share.
Speaker 4: In addition, based upon a holistic assessment of the company's position, including the last few quarters performance, and our expectations moving forward, the Board has also approved a special dividend of $1 per share.
Speaker 4: Finally, we've put in place a $100 million share repurchase program, which provides us with an additional lever to create shareholder value.
Speaker 4: For mid-sized tankers, spot rates during the first quarter of 2023 were the highest ever of the first quarter of a year, and remained firm, albeit volatile, in the early part of the second quarter.
Speaker 4: We've recently seen record high US crude oil exports and crude volumes out of Russia remain strong adding significant support to mid-sized tankers. Overall global oil demand remains on track to increase by 2 million barrels per day this year driven in large part by China's economic recovery.
Speaker 4: and increased travel following the relaxation of COVID lockdowns.
Speaker 4: Perhaps most importantly, fleet supply fundamentals remain in excellent shape, with low fleet growth virtually absurd for at least the next few years.
Speaker 4: Turning to slide four, we look at recent developments in the spot tanker market.
Speaker 4: Spot tanker rates remained at historic highs in the first few months of 2023.
Speaker 4: As mentioned, plot rates in Q1 were the highest ever recorded for the first quarter of the year, given by record high crude oil exports in the US Gulf, an increase in long-haul movements in the Atlantic to the Pacific, spurred by rising Chinese crude oil imports, and an increase in Russian crude oil exports, but now moving almost exclusively on long-haul voyages to Asia.
Speaker 4: signal factors in the coming months.
Speaker 4: Turn to slide 5 and provide a summary of our spot rates in the second quarter to date.
Speaker 4: Average second quarter date rates have remained historically strong.
Speaker 4: Based on approximately 44% and 41% of weapons days booked, TK Tankers first quarter date UIFMAX and AFMAX size vessel bookings have averaged approximately $62,400 per day and $58,500 per day respectively. Currently rate is picGender.
Speaker 4: The T&K has eight ships currently chartered in at an average cost.
Speaker 4: $24,300 per day with a market market value of approximately $68 million. These vessels are currently trading in the spot market.
Speaker 4: During slide six, we look at some of the factors that have been supporting mid-sized tanker demand over the past few months. Firstly, US Crudeau export has been under rising trend in recent months, and in Q1, we see a record high average of 4 million barrels per day, with some weeks reaching over 5 million barrels per day.
Speaker 4: Almost half of these volumes were shipped to Europe directly on Aframax and Sirismax tankers, leading to an increase in mid-sized tanker ton-mile demand, with additional volumes being transported long-haul to Asia on PLCs, creating elevated demand for Aframax light-trains in the US Gulf.
Speaker 4: Secondly, Russian seaborne crude oil exports have increased since the start of the year, with exports in Q1 reaching 3.4 million barrels per day, an increase of half a million barrels per day from Q4. Furthermore, over 90% of these volumes are now flowing long-haul to India and China.
Speaker 4: following the implementation of the EU ban on Russian crude oil imports, for using significant tonne mild demand for mid-sized tankers, given that VLCC cannot load directly from shallow-draft Russian ports. While TK tankers does not transport Russian oil, the stretching of the mid-sized tanker fleet as a result of new trading patterns
Speaker 4: Although Russia announced an oil supply cut of half a million barrels per day from March of 2023 onwards, this is currently not being reflected in Russian crude oil export volumes, which remained firm in the early part of Q2. Turning to slide 7, we look at the outlook for oil demand and supply through the remainder of this year. As for the IEA, global oil demand is projected to grow by 2 million barrels per day in 2023, to a record high of just under 102 million barrels per day. Non-OECVTwentyMusic. Kim N
Speaker 4: are expected to account for 90% of this growth.
Speaker 4: with OECD demand being impacted by slower economic growth due to high inflation and rising interest rates.
Speaker 4: Oil demand is expected to accelerate during the second half of the year, as Chinese economic growth gathers pace, with reported GDP growth of 4.5% in the first quarter, providing a positive sign of an accelerating Chinese economy.
Speaker 4: Looking at oil supply, the OPEC Plus Group announced a surprise oil production cut of 1.16 million barrels per day from May through the end of the year, in response to lower oil prices and uncertainty of the global economy.
Speaker 4: This may negatively impact fever on all volumes, and although the impact will primarily be felt in the VOC semiconductor, given that the majority of the cuts are from middle eastern producers, there could also be a negative knock on effect for all crink tanker segments in coming months.
Speaker 4: Turning to slide 8, we look at the positive tanker supply and demand fundamentals which we believe lay a strong foundation for extended market strength over the next few years.
Speaker 4: Please supply fundamentals remain very positive.
Speaker 4: The global tanker order birth, when measured as a percentage of the fleet, remains at a record low approximately 4%. Although the pace of new tanker ordering has picked up since the start of the year, most shipyards are now effectively full through the end of 2025.
Speaker 4: Furthermore, the number of new orders that have been placed is relatively small compared to the fleet of older vessels which will need replacing the coming years. And therefore at this stage, we do not feel this recent ordering uptick is having a material impact on overall fleet supply in the medium term.
Speaker 4: The combination of a small order book and little stair shipyard capacity through mid-20026 virtually ensures low sleep growth over the next two to three years. It approximately 2% sleep growth expect this year and negligible levels of sleep growth in both 2024 and 2025. The combination of a small order book and little stair shipyard capacity through mid-20026 virtually ensures low sleep growth in both 2024 and 2025.
Speaker 4: As shown by the chart on the right of the slide, tanker demand growth is expected to far outweigh fleets of light growth over this time period, setting the stage for increased fleet utilization, which should drive an extended upturn in tanker spot rates over the medium term.
Speaker 3: I'm not sure if the financial slide is accurate. Thanks Kevin. Turning to slide 9 we highlight the company's high operating leverage and what that means for TNK's capacity to generate cash flow and create shareholder value in a strong tanker market.
Speaker 3: With 96% of our fleet trading in a firm spot market, our earnings in recent quarters demonstrates the power of having 51 vessels trading in the spot market generating significant free cash flow. As an illustration of that, if Q1 2023 spot rates continue for the full year.
Speaker 3: We would generate approximately $24 per share of annual free cash flow equating to a free cash flow yield of over 60%. Our strong cash flows have been used to strengthen TNK for the long term by rapidly paying down debt. In addition, they have allowed us to optimize our capital structure by exercising purchase options on vessels we had previously put into sale lease back financing agreements. Like Q4, we expect this optimization to have reduced our breakeven rates by approximately $24 per share.
Speaker 3: Reduced our net debt by over $400 million to $182 million, and reduced our net debt to balance sheet capitalization from about 40% to less than 13%. Highly supportive market conditions and our operating leverage enabled us to accelerate our progress. And we are now pleased to revise our capital allocation plan.
Speaker 3: Our updated capital allocation plan will maintain a focus on building financial strength for future fleet reinvestments when market conditions are supportive. In addition, we are initiating a 25 cent per share fixed dividend. This dividend enables us to continue building financial strength while also consistently providing a return of capital to our shareholders.
Speaker 3: A holistic assessment that considered the company's performance in recent portors and our outstanding progress in building financial strengths, combined with our tanker market outlook and the company's future capital needs, resulted in the board declaring a special dividend of $1 per share. While it is not our intention to utilize special dividends as a regular recurring
Speaker 3: $100 million share repurchase program, which provides us with another capital allocation tool, enabling us to act opportunistically to take advantage of equity market dislocations when TNK has access capital. I will now turn the call back to Kevin to conclude.
Speaker 4: Thanks, Stuart. In summary, TK tankers is in a great position with our sizable fleet of well-maintained quality affermax LR2 and Suismax tankers to benefit from strong tailwinds supporting the mid-sized tanker market.
Speaker 4: Robust tanker market fundamentals indicate multi-year support for a healthy tanker market environment, which should enable us to continue creating shareholder value by generating meaningful cash flows, returning capital to shareholders and seeking opportunities to reinvest in our business and fleet in a disciplined manner.
Speaker 2: With that operator, we are now available to take questions. Of course, thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. It is star 1 if you would like to ask a question.
Speaker 2: And with that, we'll go ahead and take our first question from John Chappell with Evercore ISI. Please go ahead. Thanks, John .
Speaker 3: result there and looks really great. So congrats on that. Stuart, if I could start with you, you know, a lot of the work that you've done on the balance sheet is put you in this position now to change the capital location strategy. 19 vessels that you've taken back from sailing least back. That'll be done. I guess by the third quarter of 23.
Speaker 3: Can you just remind us how many would remain then starting in the fourth quarter under the sale and lease back arrangements and again any timing on the ability to Exercise options to end that structure flow.
Speaker 3: Hi John , yeah, thank you very much. We have, we all have eight vessels left in sale lease back structures at the end of the year, and those come up with purchase options available in toward the end of Q1 2024. So, we'll be in a position if we, if we.
Speaker 3: you know, think appropriate to buy those ones back early next year. Okay, all eight. There will be eight remaining in total under sale, at least back at the end of this year.
Speaker 3: Okay and then all eight of those will be done by one or you have the option to do all eight of those by the end of one.
Speaker 3: Q24. So within 12 months. Correct. Yeah, in March 24. In March 2024, we have purchase options on all eight of them. That's right. Fantastic. Okay. Great. Thank you. Kevin, for you, you mentioned the volatility and you know, obviously there has been a lot of volatility and headline volatility, so to speak as well, but
Speaker 3: It seems that every time we kind of get a little mark-to-market update, it's like the VLCCs and the MRs, kind of the barbell, have been more extreme, whereas the Suez maxes and the Afro maxes, although they have been volatile by definition, are at a much higher range and at a much tighter range.
Speaker 3: What do you ascribe that to and is it strictly that the most direct beneficiaries of a lot of the You know kind of redrawing of the trade map have been those two midsized crude asset classes and do you think that that kind of sets a Stage for a higher high and higher low scenario within those two specific segments going forward
Speaker 4: Hi John , and thank you for your comments earlier. Yeah, it's interesting when you talk about volatility and you've compared the barbells of V's and MR's. If you look at Aframax, if you want volatility, we were…
Speaker 4: You know, dancing alone only 10 days ago, it's at around about all pixel levels, and now we're over $120,000 a day in the US Gulf.
Speaker 4: It's that's all ability. So I think it's we're seeing it across all segments not just at the bookends but I think on on average what we are seeing is the the aggregated monthly numbers or the quarterly numbers for the mid-sized tankers.
Speaker 4: that's all utility. So I think we're seeing it across all segments, not just at the bookends. But I think on average, what we are seeing is that the aggregated monthly numbers or the quarterly numbers for the mid-sized tankers, specifically alpha-mux and the sewage-muxes.
Speaker 4: I've just held up stronger and I think that speaks to the direct impact that these new trade routes as a result of the Ukraine war Has really been focused on that more flexible Vessel that the Afro-Maximus rhythm I presents I said in my remarks we don't take part in the Russia trade directly
Speaker 4: But it's causing a dislocation while others used to go there, is drawing them away from traditional markets. And our concentration in US Gulf and our lightering business and the Atlantic as well as the Far East has helped us to keep clean.
Speaker 4: the Afro-Racks, you know, our presence in the Afro-Racks market when it does spike, to give us the kind of returns that we're demonstrating on this call today.
Speaker 4: um you know our presence in the Afromax market when it does spike um to give us the kind of returns that we're demonstrating on this call today.
Speaker 4: Long story, it really is, the last 12 months have really been a story about the mid-sized tankers, not so much.
Speaker 4: all sectors all at the same time. They've had periods of strength, but I think as I mentioned in my remarks, the OPEC cuts are going to primarily affect the DLCs. And the Afro-Mexican issue is not clear.
Speaker 4: while on a sentiment basis may be impacted, on a ton-mile basis may continue to be strong for the rest of the summer and into certainly the Q4.
Speaker 2: Yeah, that makes a ton of sense. Thanks again Kevin, thanks Stuart. Thanks Sean. And we'll go ahead and move on to our next question from Omar Nocta with Jeffries. Please go ahead.
Speaker 3: Thank you. Hi, Kevin. Hi, Stuart. Maybe just a touch of pandering from my angle as well. I would say congrats because you guys set off on this strategic approach maybe at least five or six years ago looking to balance or strengthen the balance sheet.
Speaker 3: and you really ignored a lot of risks of taking advantage of uplifts that we saw in 2019, 2020, and you just stuck the course and here you are now. You got TK Tankersch's position of being almost in a net cash situation. So kudos to you guys. I did want to ask about clearly it's a
Speaker 3: you have the buyback, you've got the special that you just declared, and you've got the ongoing 25 dividends, you're still just based off of the way this market is, you're generating a lot of free cash flow. How are you thinking about how that free cash gets utilized? Obviously, you just announced this capital allocation, so I'm not expecting you to just start talking about what to do with the excess cash, but just in general...
Speaker 3: How do you think about that free cash as it gets generated? Does that just go straight to the balance sheet? Effectively, your debt's almost gone, so does the cash just build? Or do you now start to look at acquisitions and fleet renewal?
Speaker 3: Thanks for the comments, Omar, and yeah, we're very happy with the progress we've made over the last few years, and we think we're in a good position. In terms of the excess cash flow that we'll generate, I do expect if the tanker market stays strong that we'll quickly find ourselves in a net cash position. And as we mentioned in our prepared remarks, we'll continue to work to get the
Speaker 3: It's really with an eye to making disciplined reinvestments in our fleet as we go forward. You know, we can step back a little bit now and look at a bit more of a longer-term view of what's gone on with the company over the last several years, and we've tried to be very disciplined and focused on building our balance sheet strength, and we haven't invested in a tanker since...
Speaker 3: in order to make those reinvestments. So we'll be patient, we'll look for opportunities, and when those opportunities arise, we'll be, you know, we think we'll be positioned to take advantage of them. Thank you. That's good. And I guess just in terms of those opportunities, don't want to press too much.
Speaker 3: because you do have the flexibility to not take your time. But in terms of safe fleet additions, you can do the charter ends as you've done here recently. You can buy ships out in the open market, or you can order new ones. You're on app earlier this morning had mentioned looking at new buildings within the Suismax segment. How are you guys looking at new buildings in general? Is that something that?
Speaker 3: is compelling at this point, or if you were to put capital to work, is it more towards second hand, or do you continue with the in-charter approach?
Speaker 4: Hi, Oma. Yeah, and thanks as well for the comments. I think we said this before, when it comes to our fleet renewal.
Speaker 4: task, it's really agnostic. You know, historically, TNK has bought second hand ships, it's ordered new ships, and it's done M&A. And I don't think that changes going forward. The challenge at the moment is, in our view, new building prices relative to historic terms are.
Speaker 4: are expensive as to our secondhand values. So obviously different owners have different views but from where we sit, we don't have plans on our books right now to go into the new built market at these kind of price levels.
Speaker 3: Thanks, Kevin. Thank you. And maybe just one final follow-up. Just on the new credit facility, the 350 that will refinance the 19, at least back vessels, you're going to be winding those down. Obviously, you over the next couple of quarters.
Speaker 3: How much of that 350 are you expecting to draw initially for the pull? Once you paid off the lease is on the 19. Yes. Well, the Penda cash flow goes into Q3 and Q4, but we are able to...
Speaker 3: reacquire the vessels from the sale lease back arrangements initially with just a small draw on our existing revolver and not drawing anything on the 350. So it'll be either a very small draw on the existing 90 million dollar revolver or nothing. So if we continue to see strong cash flows into Q3 and Q4, we'll see how that goes.
Speaker 2: from Ken Hoekstra with Bank of America. Please go ahead.
Speaker 4: Hey, great. Good morning. And again, I'll echo congrats on the reshaping of balance sheet. Great job sticking with it. Kevin or Stuart, you know, you 96% spot exposed. I don't know, maybe your view of how long this lasts for in terms of.
Speaker 4: You know, you're confident by sticking with the spot. Do you look for some time charter opportunities to lock in these rates? Maybe your thoughts on the longevity of this kind of market. Hi Ken. Yeah, as we said in our prepared remarks, the way the fundamentals set up and
Speaker 4: As we said on previous calls, the change in the trade patterns as a result of the Ukrainian war, we feel in our opinion are durable. So yeah, we do have confidence that the swap market is going to be the best place for our assets to trade in and for us to maximize our cash flow generation. But we respect our smart and
Speaker 4: always keep an eye out for opportunities. We haven't seen any of late where we thought that it was worth putting vessels out. We feel we can best that performance over the next 12 months by staying spot. But we have done some short term, three month deals with.
Speaker 4: sort of outperform the spot market. So we're always looking to do things. But in terms of the longer term, 12 months plus type of deals, we don't feel that the market is rewarding us enough for committing the assets at this point in the cycle. And that's based on the confidence we have.
Speaker 3: I think it was just mentioned that you're hearing some peers start to place orders. You're still looking at it as historically expensive. Does that fear of the rising eventual order book start to pressure your rates and your view?
Speaker 3: change your outlook on things as you get more carriers going in and placing orders or just walk us through your thoughts on how you see the market panning out.
Speaker 4: Yeah, I think, you know, we recognize that there has been an uptick in ordering in recent months. But, you know, our view for the next two to three years is that we're going to enjoy a very strong period of time.
Speaker 4: minimal or non-existent fleet code. Beyond that, nobody knows. As I said, there has been an uptick. When you compare the...
Speaker 4: the uptick and an annualized that probably Christian can jump in later and give us some numbers around it. When you compare it to previous years or historical norms, the order book still isn't large. As long as that remains the case, we also look at where the fleet profile is for tankers per return.
Speaker 4: there is a large grouping of ships that are heading towards 20 years old and beyond that will eventually leave the fleet.
Speaker 4: And when you compare the number shipped on order, or that needs to be ordered to replace that fleet, it will leave the day to day trading fleet.
Speaker 4: You know that we can we can take a lot more ordering from here before we have a large negative impact Right and my last one is just with with the OPEC cuts Do you see any risk of any? Any VLCCs pressing into the mine? I know it's a different trading market, but any any pressure from that?
Speaker 4: pushing into the market and thanks for the time guys. Yeah sure it's a good question. You know OPEC
Speaker 4: cuts will definitely impact the V's because most of the cuts are coming out of Middle Eastern producers. So the V's are naturally going to look for other markets to try and penetrate. And we will see them start to move into West Africa. We have over recent months seen more VLCC volumes being picked up in the U.S. Gulf.
Speaker 4: going to Europe . But you know, as the bees struggle for alternate markets, they will they will start to trade into other areas, which in our view, as we said this, that could put a sort of a lid on how high this slot market could go in terms of the mid-sized tankerspace. But I think overall our confidence is going to be very high.
Speaker 4: is that, especially for the Aframaxes, they're not shown
Speaker 4: a vessel that can be replaced readily. And we think that the astromaxes will continue to enjoy a really strong run. As well as the suismaxes, they may be capped out a little bit where the highs don't go as high as we've seen in the fourth quarter during the summer. But they'll still be on a relative basis extremely healthy.
Speaker 4: returns for period maxes relative to historical moment. Great, appreciate the time and thoughts. Thanks, guys.
Speaker 2: Thanks, Renee. With that, that does conclude our question and answer session. I would like to hand the call back over to the company for any additional or closing remarks.
Speaker 4: Thank you for joining us today and we look forward to speaking to you next quarter.
Speaker 2: With that, that does conclude today's call. Thank you for your participation. You may now disconnect.