Q3 2024 Teekay Corp Ltd Teekay Tankers Ltd Earnings Call
The asset light model first class customer base and stability of cash flows. We also believe that growth opportunities in this business over time and we're in a great position to pursue these opportunities as they arise.
Turning to slide seven we look at the near term outlook for the tanker market spot tanker rates remains historically firm in Q3 and were amongst the highest for third quarter in <unk> history.
As is typical for our third quarter quarter rates showed a seasonal downturn compared to second quarter due to a combination of lower crude oil export volumes from various major oil producers the onset of seasonal refinery maintenance and relatively weak Chinese crude oil imports. However, as can be seen by the chart.
On the bottom right spot rates are firming at the start of Q4 in line with normal seasonality with the shape of the curve. So far looking very similar to 2023.
We expect spot tanker rates to remain relatively firm through the winter, though it's too early to say, whether they will match the strong rates seen in Q4 of last year.
We believe tango rates will be supported by a seasonally stronger oil demand and more importantly, an increase in crude oil export volumes from key producers the.
The reduction in Libyan.
Crude oil exports seen in September due to a dispute between the two regional governments also appears to be in the process of normalizing, which is adding support to tanker demand in the midst turanian.
Normal winter market factors, such as weather delays I expected to give further support to rates by tightening available.
Vessel supply as is normal during the fourth and first quarters of the year.
Finally, the potential for higher OPEC plus supply ship date decides to proceed with the unwinding of $2 2 million barrels per day of voluntary supply cups, and a possible boost to Chinese crude oil imports due to recent government stimulus.
Could also supports rates during Q4.
Turning to slide eight we look at the tanker demand and supply factors, which we believe points towards continued tanker market strength over the medium term.
Global oil consumption, which is already at an all time high is expected to grow further with projected growth of one 3 million barrels per day in 2025 as per the average a forecast from three major energy agencies.
The majority of this growth is expected to come from Asia, particularly from India, which is the second largest importer of oil in the world After China, but importantly, it is expected to be the global leader of oil demand growth going forward.
Global oil supply is also at an all time high and is set to grow further due to increasing production and non OPEC plus countries as per the IEA non OPEC supply is projected to grow by one 5 million barrels per day in 2025 led by Atlantic Basin producers, such as the United States.
Our sale and Guyana, given that the bulk of all this supply growth is in the Atlantic but demand growth is concentrated in Asia, we expect that the long haul movements of crude oil from west to east will be a key driver of tanker ton mile demand in the medium term.
We should also mention that in addition to positive underlying oil market fundamentals. The tanker market continues to be shaped by geopolitical events. This is particularly evident in the middle East where our ongoing attacks on shipping in the Red Sea region are causing tankers, particularly in product tanker sector to devote around the Cape of good hope.
Thereby adding two voyage distances and boosting tanker ton mile demand recent events in the middle East have the potential to further destabilize the region, which could impact oil production and shipping should they escalate further.
The full effects of any substance robson uncertain, but they have the potential to further add to tanker market volatility in the coming quarters.
Turning to fleet supply new tanker deliveries are set to increase in 2025 and 2026 due to orders placed over the past 18 to 24 months. However at around 13% of the existing fleet. The global order book is still below the long term average of 20%.
Furthermore, forward order book cover.
At the major shipyards currently stretches three years or more with a lack of available shipyard capacity until the second half of 2000% to 27%. In addition, the fleet continues to age with the average age of the tanker fleet currently the highest since 2002.
As can be seen by the charts on the bottom right number of vessels on order is still relatively small compared to future fleet replacement demand. The combination of a modest order book, a lack of shipyard capacity and an aging fleet should ensure that tanker fleet growth remains at relatively low levels over the next.
Two to three years.
While the pace of tanker scrapping remains very low the past two years have seen a steady flow of vessels from the conventional fleet to the so called Shadow fleet of tangos servicing sanction traits. The majority of which are older vessels, which could which would otherwise be approaching end of life. This shadow fleet now counts several hundred vessels, which generally.
<unk> operate at much lower utilization levels compared to the conventional fleet, while the future of the chattel fleet is uncertain, particularly in light of increased scrutiny and sanctions from both the U S and Europe. The migration of ships from the conventional fleet through the Shadow fleet adds an extra layer to tanker market.
<unk>.
In sum, we believe that tanker demand and supply fundamentals continue to look positive, which should lead to ongoing strength in the tanker market over the medium term.
Turning to slide nine we highlight how the Teekay tankers fleet profile is ideally situated to maximize value in the current market as mentioned at the beginning of this call. We have spent considerable effort and resources over the several years to eliminate our outstanding debt.
<unk> has enabled us to bring our free cash flow breakeven down dramatically to approximately $14000 per day, which I want to highlight is a really extraordinary level for midsized tangos amongst and amongst the lowest in our peer group.
With the fleets low breakeven high utilization for mid sized tankers and the near total exposure to the spot market. We are able to generate significant free cash flows which over the last 12 months has totaled approximately $13 29 per share. Moreover, four averaged $5000 increase in spot rates.
Above our breakeven level, our annual free cash flow yield increases four 8%, while generates approximately $2 30 and free cash flow per share.
In summary, the CK group is streamlined and fully oriented around the teekay tankers operating platform with Teekay Corp, focusing on managing its controlling interest in Teekay tankers. We are optimistic about the market dynamics ahead of us and as we continue to generate earnings and maintain our discipline and long term.
Orientation, and deploying or retaining that capital, we look forward to continuing to build shareholder value at both TNK and Teekay Corporation with that operator, we're now available to take questions.
Speaker Change: Well thank you.
Speaker Change: I'd like to signal with questions. Please press star.
One on your Touchtone telephone if you are joining us today using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again.
Speaker Change: That is star one if you would like to signal with questions Star One and our first question will come from Jon Chapell with Evercore.
Thank you and good morning.
Welcome to the Hotseat Kenneth So just multipart first question as we try to understand the structure going forward first of all is there anything else within the Teekay Corp structure that would need to be consolidated within to TNK and then secondarily, what's the plan going forward the 31% ownership there.
There's also the class B shares is there any plan to either simplify the structure into one class of shares or.
I guess become even closer.
Speaker Change: Through.
Somewhat of a consolidation type model.
Speaker Change: Good morning, John.
John: Good to be talking to you again, it's been a while but happy to be back here.
Speaker Change: So.
Speaker Change: The.
The plan going forward here is that the structure that we have right now is really that that's.
We intend to.
First of all I want to say the business on the strategy remains the same.
But we just have a simplified structure.
Speaker Change: You can sell the accident is a little bit different from from Kevin here.
Speaker Change: But what we've been really working.
Awards they over over the past couple of years is really just aligning at Teekay Corp, and TNK were the main.
Speaker Change: Investment being Teekay tankers, and with the improvement of the balance sheet right.
We basically saw that we could now take the last final Stefan align both the management structure to the dropdown of Teekay, Australia and the management companies. So to your first question that really completes that simplification.
Speaker Change: <unk>.
And there is nothing left at Teekay to be dropdown.
Speaker Change: <unk>.
To your second question in terms of further aligning the structure as you know we have.
Shareholder legacy structure at Teekay, which is important and I think that's been particularly important over the past five years for the company.
Speaker Change: I think.
What we are doing hopefully with this transaction is that we illuminating the value that we have in Teekay Corp.
We think from management side, it's important to have a strong supportive shareholder and from when we established TNK was always a controlling company of the Teekay call, but as you know so so I think we are.
Speaker Change: We're very happy with.
Speaker Change: With that structure and I think it's worked really well for US also in the last couple of years, where I think the stock has performed extremely well.
Speaker Change: Okay great.
A quick follow up on the modeling of the Australian business, So I get the $100 million.
Revenue in the $10 million of EBITDA.
Speaker Change: First of all when does that close is that a fourth quarter event or does it start on kind of January one of next year.
Speaker Change: And second of all you can just break down a little bit of that cost structure is it how much of it is DNA how much of it is kind of core opex.
Speaker Change: Just to get the model set up.
Hey, John It's Brody here.
So the first part.
We're aiming to close the transaction by the end of this year. So by December 31.
In terms of in terms of the numbers and the breakdown. It's it's showing up right now just as revenue and Opex.
Speaker Change: And so that's probably how youre going to see it going forward at Teekay tankers.
Roughly $100 million of revenue in <unk>.
Speaker Change: $90 million of Opex.
Speaker Change: Okay.
Speaker Change: Thanks, Barry Thanks Kenneth.
Speaker Change: Thank you.
Speaker Change: And the next question will come from Omar Doctor with Jefferies.
Thank you Hey, guys good morning.
Just maybe wanted to ask a couple of questions, but maybe just a quick follow up to John's last one.
Speaker Change: The Australia business.
Any of that $10 million of EBITDA is there.
There are tax that is subjective.
Speaker Change: Yes, the business is subject to tax in Australia at.
Speaker Change: 30% and there was some kind of deductions that we can take on that but it is a taxable business.
Speaker Change: Okay alright, thank you.
Okay. So just wanted to maybe ask.
Couple of questions from say the TNK perspective.
Obviously, continuing to build cash and you've found a couple of low hanging fruit items.
Within the TK system to deploy some of that capital.
Wanted to ask just in terms of other low hanging fruit you mentioned, that's it in terms of Dropdowns.
Speaker Change: Yes, now thats.
Where you are today.
Streamline the structure you have eliminated all of the debt at TNK. What would you say is your main strategic priority now for TNK.
With TK, it's continue to deliver value and build value.
I think the we've said all along here that the profile that we.
Speaker Change: We've had through this tanker cycle with the feed and Kevin has commented on that in the past, we really we really like.
Because thats, giving us maximum operating exposure to this market with a low breakeven.
We're obviously generating a lot of free.
Free cash flow I think the cyclic.
Cyclical business, it's always the discussion around when do you stop renewing.
And when do you keep.
Your exposure to the spot market and when do you start taking some time off and put the put some on time charter and similar to in the past. We are we're looking at all of that.
All the time, we're looking at potentially selling some of our older ships were looking at potentially buying a few younger ships and we're looking at potentially a chartering out some of our chips. So it remains very dynamic, but as you will know Omar.
Speaker Change: We've kept.
I've been very focused on keeping the fleet with as much spot exposure as we could and I think that has been absolutely. The right call. As we are now two two and a half years into the cycle I think we're looking we're still looking at it thats west within my.
Speaker Change: Prepared remarks that we sort of like the fundamentals I think we have a.
Speaker Change: A couple of rounds to go here still the winter has not even begun yet.
So we're kind of happy with the spot exposure, we have right now in <unk>.
The focus is really just trying to maximize.
As we can on this market that we're in.
Thanks, Ken.
Appreciate that so it seems like.
More of the same consistent strategy being methodical.
No no no real major change in the approach post this.
That simplification, that's absolutely correct, yes.
Absolutely correct I mean, we've been very aligned on that from from day, one, but obviously we have some some some legacy things and then.
And now I think we are really back to said also in my remarks, a few things some years back we had.
Teekay, which was the fully integrated company and Thats, where you what teekay tankers has become so I think thats a very exciting point.
So finally have reached that again, I think that sets us up well and gives us a lot of flexibility.
For where we can go in the next years.
Speaker Change: Yes, absolutely.
And then maybe just one final one just for me on the market and you talked about the setup, but did want to ask kind of as we think about how things are set up at this point.
The you could say, perhaps that you got a relatively stable say global Aframax fleet versus say last year or over the past 12 months, but you've now introduced this new trade pattern out of Vancouver.
Speaker Change: The <unk> expansion.
Clearly in the tanker market today, and we're looking at stock prices and sort of overall sentiment there is a sense that.
Rachel Unexciting, but.
<unk> is an approach typically things get tighter as you were highlighting in your remarks.
How do you think this winter plays out with TNX here at or near full capacity do you think the market's prepared for this our charterers prepared.
Do you think about that as we can.
Speaker Change: We get closer to.
Speaker Change: Winter.
Speaker Change: Yes, I would say there is.
Speaker Change: The winter is absolutely not over.
It's not even begun I think that's the key point it feels a little bit like the market has called the winter over before it started.
But there is absolutely a pulse in the markets.
Speaker Change: We are not.
Speaker Change: Quite seeing that take all of that we saw at this time last year as I'll just add when you look at the curve, where we're pretty close to sitting at the same level that we have to worry about this at this time.
I think we have a few new dynamics. This year <unk> is up and running and it continued to increase the loadings.
This is.
<unk> is well did last month in October I think they were up to 24 loadings I think the capacity is just over 30 loading some months we.
Speaker Change: We see more of the.
Speaker Change: The voyages going to Asia, I think nine of the all the cargos went to Asia direct for them went down and did an STS. So that's all helpful. Obviously to the volume.
Speaker Change: And I think that's the thing.
On the medium sized tanker fleet right I mean, we continue to see how those flows.
They ebb and flow right, and it's about being able to and being global and being positioned to benefit from them. So so we see variability, but there is absolutely a pulse on the market I can tell you.
Alright good.
Speaker Change: Thanks, Scott, Thanks, Brody I'll turn it over.
Speaker Change: Thanks.
And the next question will come from Ken <unk> with Bank of America.
Hey, good morning.
So if I just want to revisit the question earlier, if you are buying all of this stuff in and you said now Teekay TNK looks more like what TK did.
Can you clarify why you still have the dual listing and what we see further consolidation into that.
Yeah, I mean, we've had we've been less that Teekay has been listed since since 95 and the.
So so.
Historically, the legacy ownership structure that we have when we started the daughter companies.
We've kind of been evolving it I think what we are highlighting here I know, it's a little bit of an unusual structure, where we have two listed companies essentially invested in the same in the same underlying business.
But I think we've done a pretty good job now hopefully in illuminating.
Speaker Change: As the underlying value in TNK and then we see that.
Speaker Change: Sure it should really be flowing through to teekay going forward I think the cost of combining or.
Speaker Change: The two.
Speaker Change: <unk>.
Maybe it's something we will consider at some point, but for now I think it gives us added flexibility that we have two strong balance sheets and in this market I think having one strong balance sheet is as always a great thing, but having two is arguably even better.
Speaker Change: So as I said in my earlier remarks as well.
Speaker Change: As you all know we have.
Speaker Change: Our legacy ownership structure.
<unk> has always been a controlled comforted by Teekay and.
Speaker Change: We like that structure and its been.
Beneficial for us over the years.
I get it but I think it brings our harkens back to the days of also a lot of concern about the daughter companies being the control of the entity and having no <unk>.
I mean look at the stocks you no one's up 13% to one that is sending stuff down to the daughter.
Speaker Change: And the daughter being.
Speaker Change: Down at the opening here this morning.
Yes, it just confused a little bit why there is still the need for the two if it's all operating in London.
We'll figure it out over time does this represent the end of Teekay focusing that on other sectors, we're making investments in others. Obviously, you started off with that balance sheet to be able to invest in LNG as Fsrus shuttle tankers will now be only crude tankers.
And still be at TNK.
Yes, I think you probably asked Kevin that question in the past as well I think what's important about the companies that we have is that the.
Speaker Change: The model we have at Teekay is that we are an integrated shipping company and what that means to us at least is that we have in house technical management, we have in house commercial management, we have a global presence and we.
Speaker Change: We think that.
You add in the differentiator in the market that we're in today.
Of course, that's also capability that gives us the ability to grow into other sectors. So should we go to adjacent sectors. For example, designed to run.
It's Kevin I'll say or any other conventional shipping assets like.
Product tankers <unk> vlccs.
We could do so that's not the focus at the moment, but I think what's important is that we have the capacity to do so and that's actually how we looked at the world also in the past, we've always grown out from our internal capability to move into other sectors. So I would say.
Teekay Corp has looked at a number of different sectors over the past two years and thats been a very dynamic shaping market in different segments.
Speaker Change: But I got to say that thats the market that we like the best and we've obviously been heavily invested in it but it's performed extremely well has been crude oil tankers.
Speaker Change: And when we look around at the different sectors today, we still like that profile, we like the profile, we have in TNK, where we're able to generate a lot of cash flow and that's quite frankly, and then we like.
While we don't like where the share price is up but the valuation that we have and that we think represent good value and that's why we've been buying back stock at <unk>, we've been buying more TNK stock. So so far is it's all about creating value over the long term using our in house skills to service our customers.
Speaker Change: And Thats really what guides us.
What was viewed as is the advantage for for TNK and selling the Australian asset down to TNK and and wasn't independent review I presume was bright of independent directors done.
On the valuation.
Yes, I mean, the timing of it was <unk>. So we could make the final step of this.
Speaker Change: Streamlining so we have.
Speaker Change: Consolidated management in one of the companies you have an accurate that teekay is becoming a bit more of the of the holding company. It was very important for us to find.
Speaker Change: Find the valuation that was exactly middle of the road and I think that's actually what we've done there wasn't review done.
Speaker Change: By of course, the TNK board, but also its independent directors separately.
On the fairness of this and.
Speaker Change: And I think when.
We have external.
Speaker Change: <unk> done of the company as well.
It was very important for us to find exactly the middle of the road of this valuation and I think that's exactly what we've done here.
Speaker Change: Wonderful.
Excuse me sorry on the business.
You mentioned, the move to balance spot or future or the potential to look at some more time charter outs in balance when the right time in the market is away from spot is that something you think.
We will see in the near term where do you think we are in the cycle in terms of rates that would get you to make that.
I think that's a little bit different than maybe Kevin I talked about in the past.
Yes, I mean, obviously every quarter we won four.
To further into into the cycle right.
Speaker Change: So.
Speaker Change: But I think sitting here at the winter and looking at the liquidity in the non both time charters that are being done.
We are we comfortable with where the.
With the continued exposure to the spot market, but of course selectively I mean, yes. It makes sense there isn't a ton of liquidity.
A lot of one two or three year deals that are being done on.
Time charter at at the moment.
So I think we just need to get a bit further into the winter to see how those.
Although those opportunities will arise, but it's been a fairly quiet.
Q3, when it comes to opportunities from that perspective.
But it's something we're looking at.
Speaker Change: Constantly.
On the flip side do we keep watching the time charter ins fade away then if if we're not seeing much.
Speaker Change: Time charter activity.
Yes, I mean, that's an option as well.
Speaker Change: Our pipeline I think we are.
We're quite we're there where there is everybody is kind of watching this market equilibrium right.
And I think Thats always an interesting time and Thats why we say, okay, well at the right levels, we would put some some vessels away on time charter.
Speaker Change: And without giving you the exact number here, but at the same time given that we have.
Very low cash flow breakeven and we can also stomach.
Speaker Change: Keeping on the exposure to what we still things should be a pretty healthy winter here and then see where we are next year.
Speaker Change: <unk>.
Great I appreciate the time.
Speaker Change: <unk>.
Ken: Thanks, Thanks, Ken.
Speaker Change: And that does conclude the question and answer session I will now hand, the conference back over to the company.
Well, thank you very much for listening to our earnings call today.
Speaker Change: We look forward to reporting back to you with next forum have a great day.
Well. Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Speaker Change: Yeah.