Q3 2023 Teekay Tankers Ltd Earnings Call
Okay.
Yeah.
Welcome to the Teekay tankers L. P D third quarter 2023 earnings results Conference call.
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Afterwards, you will be invited to participate in a question and answer session.
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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'll find a copy of the third quarter of 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 additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in our third quarter 2023 earnings release.
And earnings presentation available on our website.
Now I'll 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 2023 earnings conference call.
Joining me on the call today are and try to 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 $106 million in the third quarter up from the $92 million, we generated in the same quarter of last year.
We reported adjusted net income of approximately $77 million or $2 24 per share.
An increase from last year's third quarter levels of $58 million or dollar and 70 cents per share respectively.
Our significant operating leverage combined with the historical high third quarter spot rates resulted in teekay tankers generating our highest ever third quarter adjusted net income.
As a reminder, for every $5000 increase in tanker rates above our free cash flow breakeven of $16000 per day, we expect to generate approximately $2.60 of annual free cash flow per share.
We will provide further information of this later in the presentation.
In line with our fixed quarterly dividend policy, we have declared a cash dividend of 25 cents per share for the third quarter of 2023.
As previously announced we completed the repurchase of four vessels, which were on sale leaseback arrangements for $57 million.
These vessels were financed with our $350 million revolving credit facility.
In the market rates remained firm on a historical basis with average mid size rates the highest for a third quarter in 15 years.
These high average spot rates were achieved despite spot tanker rates declining in the second half of the quarter due to a combination of reduced exports from OPEC plus and normal seasonality.
Spot tanker rates have however, firmed significantly once again see the early part of fourth quarter and we believe the increased tanker demand and seasonal factors will continue to support rates through the winter months.
While seasonality and geographical factors will continue to play a role tanker.
The tanker market fundamentals point to continued strength over the next two to three years underpinned by a very positive fleet supply outlook.
Finally, we extended one in charter vessel for an additional 12 months at a rate of $21250 per day.
Our in charter fleet of eight vessels now has an average charter in rate is $25000 400 per day.
And the company also has two vessels chartered or an average of $43000 500 per day.
Turning to slide four we look at third quarter dynamics in the spot tanker market.
Spot tanker rates remained historically hot firm during the third quarter the rates fell during the second half of the quarter due to reduced exports from the OPEC plus group and normal seasonality.
Saudi Arabia announced a voluntary supply cut of a million barrels a day in July 2023, and has pledged to keep these cuts in place to the end of the year, which has negatively impacted crude tanker demand for larger ships.
In addition, Russian crude oil exports fell during the third quarter as higher Russian domestic demand during the summer resulted in less crude oil available for export.
Seasonal factors also played a part with lower crude demand from refineries during the quarter due to normal seasonal maintenance.
Despite these factors tanker rate averages remain firm on a historical basis with TNK recording the best midsized tanker spot rates for a third quarter in the past 15 years.
At the start of Q4 spot tanker rates have increased sharply as seaborne crude oil volumes have increased as shown by the chart on the right slide.
We believe that this marks the start of the seasonally strong winter market and we will give more detail of our outlook for the coming months later in the presentation.
Turning to slide five we provide an update on our suezmax and aframax size, but.
Rates in the third quarter to date.
Based on approximately 42% and 37% of revenue days booked teekay tankers third quarter to date, Suezmax and Aframax size vessel bookings have averaged approximately 26500 per day and 38800 per day, respectively.
As you'll see from the Green dots on the chart. The current reported rates from Clarksons are now sharply higher which speaks to the tightness in the tanker market in.
And the effect of increased seaborne crude volumes.
As voyages agreed during the latter part of Q3 in early October are completed and replaced by those reflecting the more recent higher spot market we.
We expect our own spot rate results to strengthen as we move further through the quarter provided rates remained firm.
Importantly, I would highlight the value being created by T. Encase eight vessel chartered in fleet with fixed trading in the strong spot market.
As an average in charter rate of $25400 per day.
The chartered in fleet is a current mark to market value of approximately $56 million.
Turning to slide six we look at our outlook for the upcoming winter tanker market.
As mentioned earlier spot tanker rates have risen sharply at the start of the fourth quarter. One of the main drivers has been an increase in crude oil exports from key load regions, including a reversal of supply cuts from both Russia and Saudi Arabia.
As shown by the chart on the left Russian crude oil exports have recovered from a low of $3 1 million barrels per day in July to 3.5 million barrels per day in October.
With over 90% of these volumes heading long haul to India and China on Aframax and Suezmax is this increase has resulted in their turn a significant mid sized tanker demand as we saw earlier in the year.
Similarly crude oil exports from Saudi Arabia have increased from a low of 5.5 million barrels per day in August to an average of $6 5 million barrels per day in October.
This increase comes despite Saudi Arabia is voluntary production cut of 1 million barrels per day remaining in place as lower domestic demand and refinery maintenance has made more oil available for export.
Crude oil exports have also been strong from other key mid sized tanker load regions.
Such as the U S Gulf and West Africa.
The removal of U S sanctions on the Venezuelan oil industry could give a further boost in the coming months as more oil is expected to flow to the U S and Europe on mainstream Aframax and Suezmax tonnage at the expensive movements to China on the dark fleet.
Higher refinery throughput should also support crude tanker demand in coming months as refiners increase their crude purchases ahead of the winter.
Demand in season.
As shown by the chart the IEA expects the global refinery throughput will increase by 2.4 million barrels per day between October and December we should be positive for tanker demand.
Normal winter market factors, such as weather delays are expected to give further support to rates by tightening available vessel supply as is normal during the fourth and first quarters of the year.
Turning to slide seven we highlight the positive tanker supply fundamentals, which we believe will underpin a strong tanker market over the next two to three years.
Firstly, the tanker order book remains close to historic lows at just under 6% of the existing tanker fleet size.
As per Clarksons Global shipyard forward cover currently stands at three and a half years, the highest level since 2009 with 90% of the order book comprising vessels other than tankers.
This means that the delivery of the small tanker order book will be spread out over a longer than normal period.
And there are limited berths available for additional deliveries prior to 2027.
While we acknowledge that pace of tanker ordering has increased in 2023 compared to last year's historical low levels.
This increase needs to be put into context.
Just under 24 million deadweight tons of new tanker orders has been placed to date during 2023, which is in line with the average level of Newbuild ordering over the last 20 years.
Furthermore, the tanker fleet is aging with a significant portion of the fleet, reaching potential replacement age in the next few years.
At present, 11% of the midsized tanker fleet, he's aged 20 years or older with another 14%, reaching age 20 between 2024 and 2026.
The combination of a smaller tanker order book and aging tanker fleet and a lack of shipyard capacity are expected to lead to very low levels of tanker fleet growth for at least the next two to three years.
Using our internal ship supply forecast model, which is based on the current order book and it seems very conservative levels of ship recycling, we project at less than 1% fleet growth in 2024, and 2025 and negative fleet growth in 2026.
I'll now turn the call over to Stewart to cover the financial slide.
Thanks, Kevin turning to slide eight we highlight the significant shareholder value and increasingly strategic optionality being created by Teekay tankers.
With almost all of Tnk's 53 vessel fleet trading in the firm spot market, our high operating leverage once again enabled us to generate substantial free cash flow in the third quarter, which had seasonally lower rates, particularly in August we generated $98 million of free cash flow.
Q3, 2023 spot rates our forecast for the next 12 months, we would expect to generate about $350 million in annual free cash flow for $10.25 per share annually equating to a free cash flow yield of approximately 20%.
Generating almost $100 million of shareholder value in the seasonally weakest quarter of the year clearly demonstrates how well teekay tankers is positioned to create value in this market.
During a full year of spot rates the chart on the slide also shows.
Our free our forecast annual free cash flow based on average spot rates achieved by Teekay tankers in the last 12 months.
With these rates TNK is forecast to generate over $18 per share of annual free cash flow equating to a free cash flow yield of approximately 36%.
With the tanker market now in its sixth consecutive strong quarter and with the market fundamentals pointing towards sustained strong market. We believe the company is very well positioned to continue creating shareholder value and strategic optionality.
In terms of our financial position, we have leveraged our strong cash flow generation and our increasing financial strength to further optimize our balance sheet. Since March of this year, we have repurchased 19 vessels from sale leasebacks for total of $364 million.
Refinancing these vessels into revolving loan facility has allowed us to maintain readily available capacity to take advantage of opportunities, while paying down debt balances and reducing interest expense. In addition, given our financial position, we elected to terminate our $80 million working capital loan facility. These steps have allowed us to.
Further reduce our breakeven levels and increased value creation for our shareholders.
Looking forward, we have eight vessels remaining in sale leaseback arrangements for which we have purchase options totaling $137 million available beginning in the first quarter of 2024, while still dependent on market conditions, we anticipate exercising those options and completing that phase of our balance sheet optimization fine.
As mentioned on the last call. We are in a net cash position, which reached $83 million at the end of the third quarter.
I'll now turn the call back to Kevin to conclude.
Thanks Gerard.
In summary, with vessel fleet growth is essentially fixed at a very manageable level for the next few years, we see the potential for a strong and healthy extended run for the overall tanker market and for Teekay tankers in particular.
Our spot market exposure.
<unk> financial position and focused participation in the midsized crude segment.
He is in our view, putting us in a very good position over the next few years to capture both opportunities and added value for our company.
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<unk>.
Yeah.
Our first question is coming from Jon Chapell with Evercore.
Thank you good morning, and good afternoon.
But if I can start where you left off on the creating significant shareholder value and strategic Optionality should we think about this <unk> 24, eight remaining vessels on sale leaseback kind of the clearing event.
You generated a ton of cash the net cash position has continued to move up most of the levered balance sheet in the industry, one special dividend, but maybe you know.
How do we think about capital allocation going forward do we just have to finalize this one last piece of the balance sheet restructure and then we can think about capital return being ratcheted up.
Hi, John Yes, thanks for the question.
I see the the final sale leasebacks and acquiring those as really an incremental step is in terms of optimizing the balance sheet and not really a major event. It's just a progression as we've said in our prepared remarks, where we are in a net cash position.
And that's not going to change significantly when we purchased those those those vessels back.
We came out with the capital allocation plan six months ago, which as you know included a fixed dividend.
When we announced it we also paid a $1 special dividend and we put a share buyback program.
Program in place and I would say in broad terms that the market has unfolded roughly in line with what we expected when we put that in we've been very bullish on the tanker market and and it's deliberate over the last six months.
I don't see any change in our capital allocation in the near term.
Of course, we understand that shareholders are interested in our return of capital and we have the tools in place to do that.
Anything above our quarterly fixed dividend will be.
Subject to discussions that we have with with our board and making decisions to return anything in addition to the 225 a quarter.
When we when we announced the policy. If you recall, we said that that's something that we would likely do on a periodic basis.
That's still our plan going forward.
Okay. Thank you and then just a follow up for Kevin on strategic Optionality. So.
Asset values continue to move higher you've just laid out a very optimistic view on the market for the next two to three years, which would make me think that there's more willing buyers and willing sellers have continued to put pressure upward pressure on asset values. When you think about the modernization of your fleet.
Could you also consider and I think I ask this in a different way last quarter. So forgive me, but.
Could you modernize the fleet by selling older tonnage at a pretty premium prices as opposed to I think some people fear is a rock and a hard place of going out and buying assets at a peak.
Yeah, I think it's it's an arithmetic question if you sell older assets. Your average fleet age comes down but.
The way we look at it is yeah.
What is the best thing to do with our fleet and at this point in time were extremely comfortable with where our fleet stands today.
You know it is in line with industry average profiles, it's in a fantastic segment and the mid sized tanker space.
And we're you know we're benefiting from the the ton mile increases.
As a result of Europe banning the they're the Russian imports, but you know that the world. There's a lot going on right now and in our view, there's there's really no rush to do anything where we're really in a good position. So our forward views of market is strong we can.
<unk> to trade our assets for for several years into the future without any difficulty.
We could as you've mentioned, we could also sell and with asset prices being high we keep our options open if if we're.
Offered you know.
A very nice opportunity to sell an asset and add incremental value above all our forward expectations are will obviously consider that but its really a.
Portfolio views that we take on on the fleet and you know I don't see the need with with the strategy that we have I don't see the need right now to to pull the trigger.
To do anything immediately.
Okay I appreciate it thank you Kevin Thanks, Sir.
Thanks, Sean.
Our next question coming from Omar.
Jeffrey Your line is open.
Thank you Hi, Kevin Stewart.
Good morning, Yeah, just yeah.
Following up I guess on John John <unk> line of questioning and also kind of the basically the same topic that seems to come up each quarter is yeah. Just indeed, the the the thought process or where kind of what your strategic plans are longer term I guess, Kevin you pretty much laid it out there that.
You're comfortable you've got the fleet you want its generating a good amount of cash, especially in today's market, but you don't feel the pinch to go out and do anything in terms of acquiring assets.
And then you mentioned if somebody were to present you with an offer on some shifts would be happy to entertain it. If it was if it was good enough I guess kind of in the in the.
Bigger picture Grand scheme, when you think of the Teekay tankers going forward would you characterize it as perhaps maybe like a closed end fund where you're generating strong returns are giving it.
Right now, you're you're repaying down you're paying down debt and strengthen the balance sheet, but do you see it.
Moving to where it just it becomes a capital return story and then eventually selling the company altogether.
I think the way we look at it Omar as you know we've put ourselves in a very good position. We have a fleet that is facing a very strong market and we believe we've got the fleet that sit in the sweet spot in the tanker space not the mid sized tankers.
We're benefiting from from what is going on in the World right now and.
The durable ton miles that have increased significantly.
The the industry's fleet profile is aging. So there is and Teekay tankers is no different in this there is a need to do fleet renewal at some point.
But we also feel that theres no need to rush into that.
We've got time and yes, we can sell some of our older assets and we may do so but in the meantime, we want to try and maximize our exposure to the strength of the market and keep ships you know bringing in rates that we're getting today at $70000 a day that is adding shareholder value.
Our view.
So in the future will we will deal with what comes our way, but for now it's really around maximizing the potential of the fleet with God.
Before we take any further steps to to rejuvenated.
Maybe just following up on that a little bit Omar if we were viewing it as it is a closed end fund I think you'd see us being a significant dividend payer and.
And distributing the capital that we're generating.
We're not doing that we're holding onto the capital N and creating capacity to be to reinvest in our fleet and.
That wasn't in our prepared remarks, this quarter, but certainly last quarter that our focus is putting ourselves in a position to reinvest when the time is right and in an investment that we think will be accretive and add value for for our shareholders.
Okay. Thanks, Thanks, Jordan, Kevin that that's helpful. I guess and you know you've been on this planet for perhaps every four or five years really really focused on deleveraging.
From a very high leverage ratio to now net cash and so you've been playing the long game here. So I guess this is basically what what's happened as you you've taken you've taken advantage of a strong market to Delever you got yourself in a great financial position you are now harvesting all the excess cash flow and just enjoying it.
Providing you.
Tremendous flexibility, but in terms of.
Looking to invest it's basically you just need to wait for the perhaps that gets the next that the next part of the cycle, whether that takes two years or three years. If we're in the tanker market upswing that lesson to say 25, 26, and we just expect teekay to teekay tankers or just hang back generate that cash flow build up a nice cash cushion in there.
Then once the cycle turns that's when are you going to deploy capital in a different manner.
I don't think it's that binary Omar I think that there are opportunities arise at different times, we always are evaluating opportunities for investment whether that's in one vessel fleet of vessels or what have you. So.
Yes, so our view is that it's not that binary and we're always looking for ways to do deals that can create value and we will continue to continue to do that our guests are messages that we are being disciplined and we will only do deals that we think will create shareholder value.
Yes.
Thank you.
Thanks, Stuart I, that's clear and yeah, I'll turn it over thanks again Kevin.
Yeah.
Thanks Omar.
Our next question is coming from Ken <unk> with Bank of America. Your line is open.
Hey, Hi, this is Nathan <unk> dialing in for <unk> congratulations on the great results.
I guess I just wanted to follow up.
This train of thought on the on the long game that Teekay tankers is playing here I mean.
Like.
And many times I recall, it's been referenced that rates are currently historically strong and with <unk> and Swiss rates here in the Seventy's and Eighty's.
I guess I, just I'm curious as to what management is thinking about.
Spot exposure over the long term.
I understand that the fundamentals are still very much intact, but.
Are there any considerations and bring down 96, maybe down to say like the eighties or Seventy's, maybe talk a little bit about demand for longer term charters from from the charters out there.
Sure Nathan that's it's a good question actually.
At the moment we're.
96% exposed to the spot market, we're confident that the fundamentals are there for this spot market to continue.
At these these sorts of levels, we've been seeing this year.
So it really in our view it makes more sense to be more spot exposed say then to start locking in time charters.
If you look at the forward order book that supports the the longer view.
Yeah, that's that's why we want to be.
Incrementally more exposed to the spot market, having said that and Ive said this almost on every call every quarter is we always on a daily basis keep our eyes open.
On the time charter market, both to out charter or to in charter and if we see opportunities where a customer is willing to.
Yeah.
Give us fixed rate employment.
Or a year or a number of years at rate levels that we find so attractive.
Then we will deploy that shipped to that customer and do those deals. Similarly, if we find an owner who is willing to give up a ship.
At a rate, where we feel we can make a margin by trading that ship.
Into our fleet in the spot market you'll.
You'll see us take ships as we've done with the the eight ship fleet that are that we've been chartered over the last 18 months. So.
It's it's not a mathematical equation, it's it's more of a sense of where we think opportunity lies and at the moment, we feel that the having a higher percentage of our fleet in the spot market is where we're going to generate the most value, but as I said that gets evaluated on a daily Bay.
<unk> and it could change as we as we move forward a lot depends on the opportunities that get presented to us.
Great. That's really helpful. Thanks, Kevin I mean like the 20th 1025, 2000 2000 per day chartering.
It's a.
Very well done.
Just just to follow up a little bit more on the sale leaseback side of things clearly interest rates are rising, which I'm sure was an off site, but maybe Stuart could you could you just remind us again on the financing benefits.
From the repurchase this quarter as well as the one in 124. Thank you.
Sure. So this quarter we.
Repurchased four vessels, which were on sale leaseback for about $57 million those had been on leases.
Which we're at LIBOR plus.
Or silver plus 285.
We have eight vessels that we can repurchase in Q1 of next year. The purchase option price on those is about $137 million and those are currently on at.
So for plus 275, so about both of those were effectively eight 4% interest we were paying on those.
So that's what will be but that's what we purchased back in we'll be purchasing back in in Q1, So all told.
For 2019 or for 2023 in Q1 of 2024, that's there'll be a total of $532 million of leases that we will have bought back.
And that's probably in the neighborhood of about $20 million a year interest savings in terms of the optimization from from doing that instead of carrying those leases.
Perfect. Thank you so much.
Youre welcome.
And there are no further questions at this time I would like to turn the conference back to you for any additional or closing remarks.
Thank you for joining us today, and we look forward to speaking to you next quarter.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect.
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