Welcome to Teekay Tankers Limited's Second Quarter 2023 Earnings Results Conference Call. 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.teekay.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 those projected by those forward-looking statements. Additional information concerning factors that could cause actual results to differ materially 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 2023 Earnings Conference Call. Joining me on the call today are Stewart Andrade, Teekay Tankers' CFO; and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $185 million in the second quarter, more than triple the $58 million we generated in the same quarter of last year. We reported adjusted net income of $149 million or $4.38 per share, almost 6 times last year's second quarter levels of $25.7 million or $0.76 per share, respectively. As a reminder, given our high operating leverage for every $5,000 increase in day rates above our free cash flow breakeven of $16,000 per day, we expect to generate approximately $2.60 of annual free cash flow per share. Our second quarter results reflect the high operating leverage as our owned fleet and 8 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 $0.25 per share for the second quarter of 2023. We have also continued to exercise purchase options on sale-leaseback vessels, in this case, giving notice on an additional 4 vessels for $57 million. As previously mentioned, we will be refinancing these vessels with our $350 million revolving credit facility. Once repurchased in September, these 4 vessels will bring our total sale-leaseback repurchases to 19 vessels and $365 million since March of 2023, reducing our interest expense and giving us the ability to better manage cash and debt balances. In the market, we saw very strong spot rates for mid-sized tankers in the second quarter, driven by strong Chinese and Indian oil imports as well as firm oil exports in both Russia and the United States. As we have moved into the third quarter, we have seen quarter-to-date spot rates following the normal seasonal pattern while remaining well above historical levels for this time of the year. We continue to believe that tanker supply and demand fundamentals are positioning the market well for both the coming winter and an extended period thereafter. Finally, we extended 2 chartered-in vessels for an additional 12 months each at an average rate of $20,600 per day while also securing a further 12-month option on one vessel at what we believe is an attractive rate. This takes our average in-charter rate for 8 vessels to $25,000 per day. We remain active in managing a time charter book that generated substantial incremental earnings and free cash flow, including approximately $18 million in Q2 of this year. Turning to Slide 4, 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 at least a 3-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 to Europe. As is typical at this time of the year, spot rates have moderated in Q3 to date, primarily due to seasonal factors. As an example, we have seen that Russian crude oil export volumes have decreased in the past few weeks, which we believe is due to an increase in Russian 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 remain well above historic levels as shown by the chart. The red dots in the chart indicate our prior third quarter earnings and show the current quarter averaging well above any third quarter seen in the last decade. In fact, 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, the seasonal dip in rates, which is typically observed during Q3, has 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, the onset of winter seasonal factors, coupled with rising oil demand through the second half of the year, could lead to even more favorable conditions than in the third quarter to date, leading to another firm winter tanker market. I will 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 vessel bookings have averaged approximately $42,800 per day and $48,300 per day effectively. In both instances, well above the strong third quarter of 2022 spot rates. While current spot market rates have decreased from these very firm quarterly day rates, rate volatility is expected, particularly in periods of market strength. Importantly, I would highlight the value being created by TNK's 8 vessel chartered-in fleet given the continued market strength. With an average rate of $25,000 per day and 6 vessels traded in the spot market, the chartered-in fleet has a current mark-to-market value of approximately $64 million. Turning to Slide 6, we look at some of the fundamental factors which we believe will continue to support the strong tanker market over the next 2 to 3 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. As per the IEA, global oil demand is set to increase by 3.2 million barrels per day this year to a record high of just over 102 million barrels per day with further growth of 1.2 million barrels per day projected for 2024. While production from the OPEC-plus group is uncertain, supply from non-OECD continues to grow. Most of this growth is from Atlantic Basin producers such as the United States, Brazil, and Guyana. Given that demand growth is concentrated in the Asia Pacific region, an increase in long-haul movements from the Atlantic to Pacific should be a positive driver of tanker ton-mile demand over the medium term. In the middle, we show average voyage distances continue to increase due to changing trade patterns as a result of the Russian invasion of Ukraine in early 2022. Since the EU ban on Russian oil imports was introduced late last year, approximately 90% of all Russian crude oil exports have been moving long-haul to India and China. Given that VLCCs cannot load directly from Russian ports, this change has primarily benefited the Aframax and Suezmax sector. Although TNK does not carry Russian oil, Suezmax and Aframax size vessels have 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 midsized tanker ton-mile demand for the foreseeable future. Finally, fleet supply fundamentals continue to look very positive, with the tanker order book remaining at historic lows of around 5% of the existing tanker fleet. Although this year has seen an increase in tanker ordering compared to below 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, meaning that fleet growth could remain low over the medium term. The shipyard capacity is now largely sold out for 2025 deliveries. Low fleet growth over the medium term is all but set with approximately 2% fleet growth expected in this year and close to 0 growth in both 2024 and 2025. In sum, we retain our positive outlook for tanker rates over the next 2 to 3 years and believe that the factors which are supporting this upturn are durable in nature. This is in contrast to recent market upturns such as early 2020, which were driven by more short-term transitory factors. I will now turn the call over to Stewart Andrade to cover the financial slides.

Thanks, Kevin. Turning to Slide 7, 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 4 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 4 quarters, we would expect to generate a total of about $19.50 per share in 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 4 tankers in September, with purchase options on the remaining 8 vessels under sale leaseback arrangements available in Q1 2024. I will now turn the call back to Kevin to conclude.

Thanks, Stewart. In summary, our discipline in capital allocation and the strong market for midsized tankers have enabled us to build Teekay Tankers' balance sheet into excellent condition. Our fleet of spot market employed midsized tankers positions us well to generate a great deal of free cash flow moving forward. Sustainable multi-year fundamentals support a tight midsized tanker market. We will remain disciplined in deploying that cash under our capital allocation policy, and we believe that we are set up well to drive significant shareholder value creation. With that, operator, we're now available to take questions.

Our first question comes from the line of Jon Chappell with Evercore ISI.

Stewart, if I can start where you left off, and you probably anticipated already because you already partially answered it. But with the rest of the sale-leasebacks coming up in the first quarter, having a pretty good line of sight on what that spend will be, and being net debt free today, do you anticipate just kind of saving up capital for that Q1 event where you can really clear the decks on the sale and leaseback? Or if there is a seasonal uplift, let's say, starting in the fourth quarter, does that make that not really mutually exclusive with ratcheting up either a special dividend or maybe the base dividend?

Thanks, Jon. I think at this point, as you said, we've got good visibility on the 2 remaining groups of purchase options, which in total are about $200 million. So I don't think that's moving the needle significantly in terms of our near-term thinking on the dividends. We announced just last quarter a change to our capital allocation policy of $0.25 per quarter. I don't think you're going to see a change to that in the near term, something that we continue to think about, but I wouldn't expect to see a change. As you know, we've decided that we will use special dividends as the avenue for returning extra capital to shareholders and/or utilizing the share buyback program, which we announced last quarter. But that's something that we're going to look at on a more periodic basis, not something that we'll be doing on a quarter-to-quarter basis. So I think we'll probably wait to see how the next few quarters unfold and then make a call in terms of what we want to do on that side of things.

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 with the euros breaking the price cap of $60 per barrel, maybe some more disruption to the midsized fleet and maybe in a not favorable manner of vessels that were trading Russian crude, still within compliance of the sanctions, now being fearful of violating those and coming back in the main train lines and maybe putting some pressure on. Have you seen any of that yet? And does that really impact at all kind of your near-term view on supply/demand within your 2 core segments?

We have seen it. Obviously, going into the current spot market right now, we have seen Europe and U.S. Gulf come off quite significantly versus the Far East, which is still holding off at $30,000 a day. And I think some of that is a function of the drop in supply of Russian oil, which I think history will probably confirm this, but I think we've seen about a 20% drop in Russian oil exports since May. And that was more oil, I think, is driven towards the refining sector rather than the export market. But I think also with the price cap breach, TNK doesn't participate in that trade. But from what we're picking up from people who do, there are still the ability to load Euros crude, for example, provided they get the attestation and some owners have indicated they are getting those attestation still. Having said that, we have seen an increase in the tonnage lifts as the number of players who did participate in that 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 immediate spot rates. I think as we move forward, we will see the volumes pick back up as the working refineries go into maintenance in the fall. So that should be supportive as we get into the fourth quarter as we see more export volume picking up.

We'll go next to Omar Nokta with Jefferies.

Just sort of looking to follow up a little bit on the balance sheet. Obviously, cash flow is coming in a large amount, and you're deleveraging pretty quickly. And as you mentioned, Stewart, you're in a net cash position. I guess maybe just first question on this is you've exercised the 4 ships for the $57 million. 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?

It will depend on how the next quarter goes. For the first purchase options, September will depend on how the next quarter goes. And then for the others in Q1, again, it will 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 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 prearranged it. So those vessels will go in there. But whether we need to draw on it to make that repurchase or not will just depend on the spot market.

I was trying to understand how the freight market might impact your plans. It seems you could pay down debt using cash, leave the facility as it is, and you also have the $200 million option you mentioned for next year, which you might also fund with cash. I'm curious if your goal is to completely eliminate debt from your balance sheet. You've already addressed the bank debt, but you still have lease debt. Do you see yourself aiming to reduce both types of debt to zero while maintaining stronger cash reserves on your balance sheet?

We haven't made a final decision on exercising the purchase options for the vessels in the first quarter. These options are available for about $150 million, but we are still considering our options. If we decide to proceed, we would expect to be completely debt-free and have cash on hand. As we mentioned in our capital allocation policy introduced last quarter, our top priority is to build capacity for timely reinvestments in the fleet when opportunities arise. We have not acquired a tanker since 2017, so it's been quite some time. We have focused on being disciplined and strengthening our balance sheet. However, this has positioned us to make significant investments when the right opportunities come up, and we are preparing ourselves for that. Currently, we are generating cash flow because we operate 53 vessels, thanks to previous investments in our tanker fleet. For long-term value creation for our shareholders, we recognize the need to reinvest and plan to do so in a disciplined manner when opportunities present themselves.

And I guess we'll see how those opportunities start to play out. Just one final follow-up and just back to the debt. I saw in the release you mentioned that you've terminated or canceled a $65 million credit facility that was due to mature next year, it was undrawn. Just wondering kind of out of curiosity, what was the reason for terminating that?

Yes. Given our liquidity at the end of Q2, which you saw is over $600 million, we didn't really have the need for the extra liquidity that that facility provided us. Of course, all revolving credit facilities or our revolving credit facilities in any case have a carrying cost. And it was just really an optimization decision to avoid the cost of having that extra availability when we don't really need it, and we're accumulating cash flow quite quickly from operations. So it was really an optimization decision.

We'll go next to Ken Hoexter with Bank of America.

This is Nathan Ho dialing in for Ken. I just have a quick housekeeping question. First, I see in the presentation, there's a slight pickup in your free cash flow breakeven TCEs to $16,000 from $15,000 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 slight increase?

I don't have the specific details on that, but the main reason for the increase is that we've renewed some time charters at slightly higher rates than before. Our average in-charter rate is now around $25,000 a day, which is quite attractive compared to current freight markets. Therefore, extending those time charters makes a lot of sense, but some of them are at higher rates than they were previously, which is the main factor contributing to the increase in the breakeven. We can discuss this in more detail if you'd like.

Continuing on that point, it appears that many of the capital decisions are somewhat dependent on the performance of the spot market. With an impressive $64 million mark-to-market on the charter-in contracts, can we expect some realization of those mark-to-market gains? Specifically, might we see a slight increase in time charter exposure or a slight decrease in the 96% spot exposure?

Yes, we have previously mentioned that we continually monitor the spot market in relation to the time charter market, and vice versa. In our in-charter fleet, we have eight vessels, and we decided several quarters ago to put a few of them out to secure that margin and solidify the gains. As opportunities come up, we will evaluate them against our outlook for the spot market. If we find it advantageous and valuable, we will commit to that. However, this is not part of a strategic target; it is more about seizing opportunities. Our decisions are always based on what offers us the best return over time, comparing spot rates with time charters.

There are no other questions at this time.

Thank you very much for joining us, and we look forward to speaking with you again next quarter. Goodbye.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.