Q2 2023 Teekay Tankers Ltd Earnings Call
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Or is this just 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 Dot Com, where you will find a copy of the second quarter 2023 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.
Information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the second quarter 2023 earnings release and earnings presentation available on our website.
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 second quarter 2020 earnings conference call.
Joining me on the call today are sure Im joined a 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 $185 million in the second quarter more than tripled.
The $58 million, we generated in the same quarter of last year.
We reported adjusted net income was $149 million or $4 38 per share.
Almost fixed time July .
Second quarter levels, with $25 7 million or 76 cents per share respectively.
As a reminder, given our high operating leverage.
For every $5000 increase in day rates above our free cash flow breakeven of $16000 per day.
We expect to generate approximately $2 60.
Annual free cash flow per share.
Our second quarter results reflect the high operating leverage.
Our own fleet and eight vessels chartered in fleet.
Generated a total of $170 million of free cash flow.
In line with our fixed quarterly dividend policy announced last quarter.
We have declared a cash dividend of <unk> 25 cents per share for the second quarter 2023.
We have also continued to exercise purchase options on sale leaseback vessels in this case, giving notice on an additional four vessels for $57 million.
As previously mentioned, we will be refinancing the vessels with our $350 million revolving credit facility.
Once repurchased in September these four vessels will bring our total sale leaseback repurchases to 19 vessels and $365 million since March 2023, reducing our interest expense I'm, giving us the ability to better manage cash and debt balances.
In the market, we feel very strong, but the mid size tankers in the second quarter, driven by strong Chinese and Indian oil imports as well as firm oil exports from both Russia and the United States.
We've moved into the third quarter Youre seeing quarter to date rates following a normal seasonal pattern will remaining well above historical levels for this time of the.
The year.
We can see to bleed to tanker supply and demand fundamentals are positioning the market well for both the coming winter.
Okay.
And the period thereafter.
Finally, we extended to chartered in vessels for an additional 12 months each at an average rate.
<unk> thousand $600 per day, while also securing a further 12 month option on one vessel and what we believe is an attractive rate.
This takes our average in charter rate for eight vessels and $25000 per day.
We remain active in managing a time charter book generated substantial incremental earnings and free cash flow, including approximately $18 million in Q2 of this year.
Turning to slide four we look at recent developments in the spot tanker market.
As noted spot tanker rates remained very strong during the second quarter.
This was due to a combination of strong Indian and Chinese crude oil imports.
An increase in Russian crude oil exports reached a three year high with the majority of volumes moving long haul to India and China.
And high export volumes from the U S Gulf with a large proportion continuing to be transported on mid sized tankers in Europe .
As is typical at this time of year, but rates have moderated in Q3 to date.
Primarily due to seasonal factors as.
As an example.
Europe , the Russian crude oil export volumes have decreased in the past few weeks, which we believe is due to an increase in Russia refinery throughput to meet summer demand, leaving less crude oil available for export.
However, it's important to note that seasonally lower spot rates, thus far in Q3 remaining well above historic levels as shown by the chart.
The red dots on the chart indicate our prior third quarter earnings and showed a current quarter, averaging well above any third quarter seen in the last decade.
<unk> rates in the quarter to date are higher than any quarter in the past decade with the exception of the most recent winter.
As shown by the chart over the last 10 years and it seems a little dip in rates, which is typically observed during Q3.
It's almost always reversed during Q4.
And given the tanker market fundamentals, we expect this year to follow the same pattern.
As we move into the fourth quarter.
Onset of winter seasonal factors, coupled with driving all demand through the second half of the year.
Even more favorable conditions.
For the third quarter to date, leading to another firm winter tanker market.
Provide an update on our suezmax and aframax spot rates in the third quarter to date.
Average third quarter to date rates have been historically strong.
Based on approximately 48% and 44% of revenue days booked teekay tankers third quarter to date, Suezmax and Aframax size vessel bookings.
A averaged approximately $42800 per day and $48300 per day, respectively.
In both instances well above the strong third quarter of 2022 spot rates.
While current spot market.
Alright.
<unk> remains very firm quarter to date rates rate volatility is expected, particularly in periods of market strength.
Importantly, I would highlight the value being created by Tnk's eight vessel chartered in fleet.
Given the continued market strength.
With an average rate of $25000 per day, and six vessels trading in the spot market.
Charter in fleet has a current mark to market value of approximately $64 million.
Turning to slide six if you look at some of the fundamental factors, which we believe will continue to support strong tanker market over the next two to three years.
Starting in the left column global oil demand remains very robust driven by non OECD countries and in particular, China due to a rebound in travel and petrochemical demand following the removal of COVID-19 restrictions.
The IEA global oil demand is set to increase by $3 2 million barrel per day. This year to a record high of just over 102 million barrels per day.
With further growth of one 2 million barrels per day projected for 2024.
While production from the OPEC plus group is uncertain.
<unk> from non OPEC nations continues to grow.
Most of this growth was from Atlantic Basin producers, such as the United States, Brazil and Guyana.
Given the demand growth is concentrated in the Asia Pacific region.
Increase in long haul movements from the Atlantic to Pacific should be a positive driver.
Tanker ton mile demand over the medium term.
In the Middle we show average voyage distances continued to increase due to changing trade patterns as a result of Washington invasion of the brain in early 2022.
Since the EU ban on Russian oil imports, we introduced late last year.
Ultimately <unk> 19, 90% of all of Washington crude oil exports have been moving long haul to India and China.
Given the Vlccs cannot learn directly from Russian ports. This change is primarily benefited the aframax and suezmax sector.
Although TNK does not carry erosion oil overall suezmax.
And aframax sized vessels had benefited from a 14% increase in voyage distances.
Since the start of last year.
Importantly, we expect these trade pattern changes to be durable, meaning continued support for mid sized tanker ton mile demand.
Sure.
Finally, we supply fundamentals continue to look very positive.
The tanker order book remaining at historic lows and were one 5% of the existing tanker fleet.
Although this year has seen an increase in tanker ordering when compared to the low levels of last year.
2023 ordering is actually in line with the 10 year average.
Furthermore, the tanker order book is still small compared to the fleet of older vessels that may be phased out in the next few years.
Fleet growth should remain low over the medium term.
With shipyard capacity largely sold out for 2025 delivered.
Low fleet growth over the medium term.
Is all that debt and approximately 2% fleet growth expected in <unk>.
This year and close to zero fleet growth in both 2024 and 2025.
In sum we retain.
Our positive outlook for tanker rates over the next two to three years and believe that the factors supporting this upturn or durable in nature.
Income from the recent market upturns.
Such as in early 2020.
Which was driven by more short term transitory factors.
I will now turn the call over to Stewart to cover the financial slide.
Thanks, Kevin turning to slide seven we highlight the significant shareholder value Teekay tankers has created over the last 12 months and how well we are positioned to continue creating shareholder value.
With 96% of our 53 vessel fleet trading in the spot market. The combination of Tnk's high operating leverage and a firm spot market has demonstrated our ability to generate substantial free cash flow in recent quarters.
As an illustration of that over the past four quarters. The company has generated over $600 million.
Or $17 62 per share of free cash flow.
Looking forward if the Q2 2023 spot rates were achieved on average over the next four quarters, we would expect to generate a total of about $19 50 per share and free cash flow. This equates to a free cash flow yield of approximately 45%.
With our continued strong cash flows in the second quarter, we decreased our net debt by $153 million to just $28 5 million.
Given the continued strength in the tanker market in the first part of the third quarter. We are now net debt free further supporting our ability to reinvest in the TNK fleet. When the time is right and to return capital to our shareholders. However, we still have obligations related to sale leaseback financings totaling approximately $210 million.
$57 million of which we will repay when we acquire for tankers in September with purchase options on the remaining eight vessels under sale leaseback arrangements available in Q1 2024.
I will now turn the call back to Kevin to conclude.
Thanks Stuart.
In summary, our discipline in capital allocation and a strong market for mid sized tankers have enabled us to build teekay tankers balance sheet into excellent condition.
Our fleet of spot market employed mid sized tankers positions us well to generate a great deal of free cash flow moving forward.
Is it sustainable multiyear fundamentals support a tight midsized tanker market.
We will remain disciplined in deploying that cash under our capital allocation policy.
We believe that we are set up well to drive significant shareholder value creation.
With that operator, we're now available to take questions.
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Our first question comes from the line of John .
Jon Chappell, our chapell with Evercore ISI.
Thank you.
Good afternoon or good morning.
Stewart, if I can start where you left off.
Anticipated already because you already partially answered it but with the rest of the sale leasebacks coming up in the first quarter, you know, having a pretty good line of sight on what that spend will be in being net debt free today do you anticipate just kind of saving up capital for that one event, where you can really cleared the decks on the sale and leaseback or if there is a seasonal.
Lift, let's say starting in the fourth quarter does that make that you know not really mutually exclusive with a ratcheting up either a special dividend or maybe the base dividend.
Thanks, John .
I think at this point the as you said, we've got good visibility on the two remaining groups of purchase options, which in total are about $200 million.
I don't think Thats, a moving the needle significantly in terms of our near term thinking on the dividend.
We announced just last quarter, a change to our capital allocation policy of 25 cents per quarter, I don't think youre going to see a change to that in the near term. It's something that we continue to think about but I wouldn't expect to see a change to that in the near term.
As you know we have decided that we will use special dividends as the avenue for returning extra capital to shareholders and or using.
The share buyback program, which we announced last quarter, but that's something that we're going to look at it on a more periodic basis.
Not something that we'll be doing on a quarter to quarter basis. So I think well probably wait to see how the next few quarters unfold and then make a call in terms of in terms of what we want to do on that side of thing.
Okay. Thank you and then Kevin.
Good job laying out the market outlook or maybe this is even for Christian too.
Seasonality has come up a fair amount.
As expected we have a long history of that however, I was just reading about the euro breaking the price cap of $60 per barrel, maybe some more disruption to the mid size fleet and maybe in a non favorable manner of vessels that were trading Russian crude I'm still within compliance of the sanctions now being fearful of violating.
And coming back in the main trade lanes, and and maybe putting some pressure on have you seen any of that yet.
Does that really impact at all kind of your near term view on supply demand within your two core segments.
Hey, John Yeah.
We have seen it obviously going into.
The current spark pulp market right now in Europe and in U.
U S Gulf come off quite significantly versus the far east region still holding off for now.
$1000 a day.
And I think some of that is a function of the drop in supply of Russian oil, which I think fishing.
Fishing, probably confirm this but I think we've seen about a 20% drop in Russia like Portland, Maine.
And that drove more oil I think is driven toward the refining sector, rather than the export market, but.
But I think also with the price cap breach.
Yeah.
TNK doesn't participate in that trade, but from what we're picking up from people who do there are still the ability to to load Urals crude for example provided they'd get the attestation.
Some owners have indicated that they arent getting those attestation still.
Having said that we have seen an increase in the tonnage list.
There's a number of players who did participate not obviously haven't been able to get the attestation from their customers and they are now returning to our trade, which is putting some pressure on the spot rate.
I think as we move forward.
I think we will see.
The the volumes pick back up.
One can refineries go into maintenance in the fall.
That should be supportive as we get into the fourth quarter.
And we see more export volume picking up.
That's very helpful. Thank you Kevin Thanks Derek.
Hi, Sean Thanks, Sean.
Well go next to Omar <unk> with Jefferies.
Thank you, Hey, Kevin and Stewart and good morning.
Sort of.
I'm looking to follow up a little bit on the on the balance sheet, obviously cash flow is coming in in large amounts and your deleveraging pretty quickly as you mentioned Stuart you're in a net cash position I guess, maybe just.
First question on this is you have exercised the four ships for the $57 million or do you plan to utilize the $350 million facility to sort of finance that purchase or do you really want to focus on just using cash to buy those out.
Hi, Omar Thanks for the question.
It will depend on how the how the next quarter or for the first.
Purchase options in September will depend how the next quarter goes and then for the others that in Q1 again, it'll depend on how much cash flow we generate.
Really whether we use cash on hand or need to draw on that revolver in order to finance those as is more like a near term cash flow consideration as opposed to a significant decision I guess it just depends on if we have sufficient cash in the bank to make those repayments.
The vessels, we are repurchasing will go into that facility and they will form part of the security for that facility. So we've pre arranged it so those vessels will go in there.
Whether we need to draw it to it in order to make that repurchase or not will just depend on the spot market.
Okay. Yeah, I was just sort of trying to figure out because clearly the obviously the depending on how the freight market goes from here. It looks like you could obviously pay down you could exercise those options with cash.
That facility alone and then you got the $200 million that you were mentioning that you could exercise next year, you could probably do that with cash as well and so just wondering is it an aim of yours to.
Get the balance sheet to completely debt free.
You've eliminated the bank that you still have the lease debt can you envision is that a goal of yours to take both the bank debt and the lease that to zero.
And still have a bit of cash on our balance sheet.
Yes, we haven't made a final decision on whether we're going to exercise the purchase options on the vessels in Q1 as I said they are available and that's about $150 million, we haven't made that decision yet.
But it is we may do that and if we do we would envision being completely debt free with with cash on the balance sheet as we outlined when we introduced the capital allocation policy last quarter and just to remind everybody.
Our number one priority is to build capacity for making reinvestments in the fleet at the right time, when when the when the opportunities arise and that is one of the things that we're focused on we haven't acquired a tanker since 2017. So it's been quite a long time, we've been focused on being disciplined and getting our balance sheet in order.
As a result, we do have significant investments that we if we could make if the opportunities arise at them and we're really trying to prepare ourselves for that.
The reason that we're generating all this cash flow at the moment is because we have 53 vessels trading because we made investments in our tanker fleet in the past and in our view and for the long term value creation for shareholders is that we need to reinvest and we're going to do that in a disciplined way when the opportunities arise.
Okay. Thank you that makes sense and I guess, we'll see how those opportunities start to play out.
Just one final follow up on the just back to the best that I saw in the release you mentioned that you have.
Terminated or canceled a $65 million credit facility that was due to mature next year. It was on it was undrawn just wondering kind of out of curiosity what was the reason for her.
You bet.
Yes, given our given our liquidity at the end of Q2, which you saw is over $600 million.
We didn't really need to have the need for the extra liquidity that that facility provided to us of course.
All revolving credit facilities or our revolving credit facilities at any case have a carrying cost and it was.
It's really an optimization decision to avoid the positive of having that extra availability when we don't really need it and were accumulating.
Cash flow quite quickly from operations. So it really an optimization decision.
Got it okay. Thank you that's helpful I'll turn it over.
Thank you.
Well go next to Ken <unk> with Bank of America.
Hey, this is Nathan <unk> dialing in for Ken.
I just have a quick housekeeping question first I see in the presentation, there's a slight pick up in your free cash flow breakeven Tcs to 16000 from.
From 15000 last quarter and this is in spite of some pretty impressive deleveraging moves.
Could you maybe just walk me through the math there on what's driving that.
Might increase.
Anthony Thanks for the question.
I don't have a breakdown of the fine detail on that but the big picture.
Reason for the increases that we've extended some time charters at incrementally higher rates than we had.
Previously so our average charter rate is now about $25000 a day, which is obviously very very compelling versus current freight markets.
So it makes a lot of sense to be extending those time charters, but some of them are at incrementally higher rates than they were before and that's the primary driver behind the increase in the breakeven.
We can take it offline to give you the help you with the bridge that specifically if you'd like.
Got it Okay. That's super helpful and just maybe continuing on that point it sounds like a lot of the capital decisions seem to be a little contingent on how the spot market performs.
And.
An impressive 64 million mark to market on the charter in contracts what could we anticipate some actualization of those mark to market gains.
Could we possibly see a slight increase in the time charter exposure.
Hum.
Or a slight decrease in the 96% spot exposure.
Yes, I think.
I mean, you said this.
On the calls in the past.
We're always keeping an eye on the spot market relative to the time charter market or vice versa.
And on our our in charter fleet, we have a.
And we actually made the completion crew.
Several quarters ago.
Couple of unlocking that.
Margin and crystallized.
The gain on those.
Similarly, with our fleet.
You know as opportunities arise we will.
Compare that with what we think our forward view.
Market is in.
Recruiting is compelling and adds more value will will lock in.
It's not something that we started to set a target on it more opportunistic.
It's always been flexible what gives us the best return over that period of time thought for Panther.
Got it that's clear thank you very much.
Thank you.
There are no other questions at this time.
Thank you very much for joining us for marine look forward to speaking with you again next quarter.
Bye.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
Yeah.