Teekay Corp Ltd Q3 FY2024 Earnings Call

Welcome to the Teekay Group Third Quarter 2024 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'll find a copy of the Teekay Group's Third Quarter 2024 earnings presentation. Kenneth 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 the Teekay Corporation and Teekay Tankers Third Quarter 2024 Earnings Releases and the Teekay Group's earnings presentation available on our website. I will now turn the call over to Kenneth Hvid, Teekay Corporation and Teekay Tankers' President and CEO to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for the Teekay Group's third quarter 2024 earnings conference call. With the recent management changes, this earnings call will cover both Teekay Corporation and Teekay Tankers' earnings for the quarter. Joining me on the call today for the Q&A session is Brody Speers, Teekay Corporation's and Teekay Tankers' CFO; Ryan Hamilton, our VP Finance and Corporate Development; and Christian Waldegrave, our Director of Research. Starting on slide 3 of the presentation. Over the past few years, the Teekay Group has taken several important steps to streamline the organization. Notably, this includes the recent simplification of our group management and decision-making structure and TNK's planned acquisition of our Teekay Australia business, which we will cover in more detail later in the presentation as well as Teekay Corporation's transfer of all of its remaining management service companies to TNK, which consists mainly of our shore-based staff. The results of these steps is a new structure that looks similar to historical Teekay where Teekay Tankers is positioned as the fully integrated sole operating platform for the Teekay Group and Teekay Corp. as a strong supportive sponsor. Throughout this streamlining process, we have focused the group on tankers while systematically reducing a significant debt load. I'm very proud to say that following a multiyear effort the Teekay Group today has one of the strongest balance sheets in the industry with no debt and considerable cash positions, which we believe is important in a cyclical industry as a strong balance sheet allows us to act countercyclically at the right times in the cycle. TNK will remain committed to disciplined fleet and reinvestment while Teekay will focus on managing its controlling interest in TNK and can provide financial support if necessary. On slide 4, we will cover the recent developments at the Teekay Corp. level. As mentioned, Teekay has agreed to sell Teekay Australia and also transfer its remaining management services companies to TNK to streamline and simplify the group. TNK will acquire Teekay Australia for $65 million in cash and transfer the management services companies for their net working capital value. When we closed the sale of Teekay LNG back in early 2022, the group had approximately $300 million in capital available at the Teekay level with TNK still waiting for the tanker market to turn and burdened with a significant debt position relative to the fleet profile. Fast forward to today, while TNK has a fleet that will require some renewal, it has one of the strongest balance sheets in the industry. And therefore, we do not feel the need to hold as much cash at the Teekay Corp. level as we have over the past two and a half years. As a result, the company is allocating up to $230 million of its cash back into the business and in part as a return of capital to shareholders. This includes returning $144 million of capital to its shareholders since early August or over 20% of its current market cap, consisting of $59 million of Teekay share buybacks at an average price of $8.56 per share and a $1 per share special cash dividend to Teekay Corp. shareholders for a total dividend of approximately $85 million payable in December. In addition, our Board of Directors has also authorized a new $40 million share buyback plan. Lastly, Teekay also purchased $50 million of TNK Class A common shares at an average price of just under $59 per share, increasing our economic and voting interest in TNK to 31% and 55% respectively. We believe that TNK is well-positioned to continue to generate significant free cash flow and build equity value. This increases the underlying value of both TNK and Teekay Corp. through its controlling ownership of TNK. And therefore, we believe both the TNK share purchases and the Teekay Corp. share buybacks represent good value. As a result of our simplification efforts and flexible capital allocation, we plan to continue to deliver shareholder value and hope to illuminate the underlying value in both companies. Moving to Slide 5. We will cover the highlights at the Teekay Tankers level. TNK's third quarter earnings and free cash flow remained strong with spot rates in the low to mid-$30,000 per day. Adjusted net income was $63.5 million or $1.84 per share and our adjusted EBITDA was nearly $76 million. It is important to note that we strategically planned the dry docking of 10 of our vessels during what is typically the weakest quarter of the year to ensure that our fleet was fully available for the anticipated winter tanker market uplift. On TNK's acquisition of Teekay Australia, TNK is acquiring a business with an estimated annual EBITDA of $10 million, consisting primarily of stable longer-term government service contracts at an attractive valuation. We like the stability of this government business and believe in its future prospects. I will cover this business in more detail on the next slide. With all the group's operations under TNK, it was a logical step to transfer all the remaining management services companies not otherwise owned, which is mainly our shore-based staff to TNK. Looking to what we have booked so far for the fourth quarter, it is closely in line with where we stood at this point last year, as you can see from the bar chart on the lower right on the slide. Importantly, as you can see from the red dots above these bars, the latest Clarksons reported spot rates in the market today have moved higher as we transition into the typically stronger winter season. We'll cover the tanker market in more detail later in the presentation. Lastly, Teekay Tankers has once again declared its quarterly fixed dividend of $0.25 per share payable in November. Moving to Slide 6, I will briefly cover the Teekay Australia business that Teekay has been operating for nearly 30 years. This is an asset-light and CapEx-light services business that carries out comprehensive vessel management procurement and staffing primarily for the Australian government on 11 vessels with total revenues in excess of $100 million and an average annual EBITDA of approximately $10 million. Teekay Australia's value add is its approach to the business with a shipowners' mindset. We are one of the largest employers of Australian seafarers and have strong government and industry relations that have been established over nearly 30 years. Leveraging Teekay's industry expertise, Teekay Australia has secured stable long-term contracts in a niche market. While this accretive investment for TNK is small relative to our core tanker business, we like the asset-light model, first-class customer base, and stability of cash flows. We also believe there are growth opportunities in this business over time and we're in a great position to pursue these opportunities as they arise. Turning to Slide 7, we look at the near-term outlook for the tanker market. Spot tanker rates remained historically firm in Q3 and were amongst the highest for a third quarter in TNK's history. As is typical for the third quarter, rates showed a seasonal downturn compared to the 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 tanker rates will be supported by seasonally stronger oil demand and more importantly an increase in crude oil export volumes from key producers. 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 Mediterranean. 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. Finally, the potential for higher OPEC+ supply should they decide to proceed with the unwinding of 2.2 million barrels per day of voluntary supply cuts and a possible boost to Chinese crude oil imports due to recent government stimulus could also support rates during Q4. Turning to slide 8. We look at tanker demand and supply factors, which we believe point 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 1.3 million barrels per day in 2025 as per the average of 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 in non-OECD+ countries. As per the IEA, non-OECD+ supply is projected to grow by 1.5 million barrels per day in 2025, led by Atlantic Basin producers such as the United States, Brazil and Guyana. Given that the bulk of oil supply growth is in the Atlantic but demand growth is concentrated in Asia, we expect that the long-haul movement of crude oil from west to east will be a key driver of tanker tonne-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 ongoing attacks on shipping in the Red Sea region are causing tankers particularly in the product tanker sector to divert around the Cape of Good Hope, thereby, adding to voyage distances and boosting tanker tonne-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 such disruption are 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 2027. 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 chart on the bottom right the 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 tankers servicing sanctioned trades, the majority of which are older vessels, which would otherwise be approaching end of life. This shadow fleet now counts several hundred vessels, which generally operate at much lower utilization levels compared to the conventional fleet. While the future of this shadow fleet is uncertain particularly in light of increased scrutiny and sanctions from both the US and Europe, the migration of ships from the conventional fleet to the shadow fleet adds an extra layer to tanker market volatility. 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 9, 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. This in turn has enabled us to bring our free cash flow breakeven down dramatically to approximately $14,000 per day, which I want to highlight is a really extraordinary level for midsized tankers and amongst the lowest in our peer group. With the fleet's low breakeven, high utilization for midsized tankers and the near total exposure to the spot market, we're able to generate significant free cash flows which over the last 12 months, has totaled approximately $13.29 per share. Moreover, for every $5,000 increase in spot rates above our breakeven level our annual free cash flow yield increases 4.8% or generates approximately $2.30 in free cash flow per share. In summary, the Teekay 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 in 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.

Thank you. Our first question will come from Jon Chappell with Evercore.

Thank you. Good morning. Welcome to the hot seat Kenneth. So just a 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 TNK? And then secondarily what's the plan going forward? You have the 31% ownership, 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 through somewhat of a consolidation-type model?

Good morning Jon, it's nice to be speaking with you again after some time. The plan moving forward is to maintain our business and strategy, but with a more streamlined structure. As you can notice, there's a slight change in the tone compared to Kevin. Over the past couple of years, we've been focused on aligning Teekay Corp. and TNK, with Teekay Tankers being the primary investment. With the balance sheet improvement, we've reached a point where we can finalize the alignment of both management structures and proceed with the drop-down of Teekay Australia and the management companies. This completes the simplification process, and there’s nothing left at Teekay to drop down. Regarding further alignment, we have a shareholder legacy structure at Teekay that has been crucial, especially over the last five years. With this transaction, we aim to highlight the value within Teekay Corp. It's vital for management to have a strong, supportive shareholder. When we established TNK, it was intended to be a controlled company under Teekay Corp., and we’re pleased with that structure, which has proven successful for us, particularly in the last couple of years where the stock has performed exceptionally well.

Okay. Great. Just a quick follow-up on the modeling of the Australian business. So I get the $100 million of revenue and the $10 million of EBITDA. 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? And second of all, if you can just break down a little bit of that cost structure. Is it – how much of it is D&A? How much of it is kind of core OpEx just to get the model set up?

Hey, Jon, 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 the numbers and the breakdown, it's showing up right now just as revenue and OpEx. And so that's probably how you're going to see it going forward at Teekay Tankers is roughly $100 million of revenue and roughly $90 million of OpEx.

Okay. Thanks, Brody. Thanks, Kenneth.

Thank you.

And the next question will come from Omar Nokta with Jefferies.

Hey, guys. Good morning. Yes just maybe I wanted to ask a couple of questions but maybe just a quick follow-up to Jon's last one on the Australia business. Is any of that $10 million of EBITDA is there a tax that it's subject to?

Yes. The business is subject to tax in Australia at 30% and there's some kind of deductions that we can take on that but it is a taxable business, yes.

Okay. All right. Thank you. Okay. Good. So I just wanted to maybe ask a couple of questions from say the TNK perspective. Obviously continuing to build cash and you found a couple of low-hanging fruit items within the Teekay 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 drop-downs. But I guess now that you're where you are today you've streamlined the structure, you eliminated all the debt at TNK, what would you say is your main strategic priority now for TNK?

Well TNK it's continued to deliver value and build value. I think the – we've said all along here that the profile that we've had through this tanker cycle with the fleet and Kevin has commented on that in the past, we really like because that's giving us maximum operating exposure to this market. With a low breakeven, we're obviously generating a lot of free cash flow. I think the – in a cyclical business, it's always the discussion around when do you start renewing your fleet and when do you keep your exposure to the spot market and when do you start taking some off and put some on time charter. And similar too in the past, we're looking at all of that all the time. We're looking at potentially selling some of our older ships. We're looking at potentially buying a few younger ships and we're looking at potentially chartering out some of our ships. So it remains very dynamic. But as you will know, Omar, we've kept and 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, 2.5 years into the cycle I think we're still looking at it. As we said in my prepared remarks, we still like the fundamentals. I think we have 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. And the focus is really just trying to maximize as much as we can on this market that we're in.

Thanks, Kenneth. Yes. No I appreciate that. So it seems like more of the same the consistent strategy being methodical and no real major change in the approach post this investment simplification.

That's absolutely correct. Yes, absolutely correct. I mean we've been very aligned on that from day 1. But obviously we have some legacy things. And then now I think we are really back to as I said also in my remarks if you think some years back we had Teekay which was the fully integrated company and that's really what Teekay Tankers has become. So I think that's a very exciting point to finally have reached that again. And I think that sets us up well and gives us a lot of flexibility for where we can go in the next years.

Yes. No absolutely. And then maybe just one final one just for me on the market and you talked about the setup. But I did want to ask kind of as we think about how things are set up at this point you could say perhaps that you've 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 via the TMX expansion. Clearly in the tanker market today and looking at stock prices and sort of overall sentiment there's a sense that rates are unexciting. But winter is on approach. Typically things get tighter as you were highlighting in your remarks. How do you think this winter plays out with TMX here at or near full capacity? Do you think the market is prepared for this? Are charters prepared? How do you think about that as we get closer to winter?

Yes. I would say, 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 market. We are not quite seeing the takeoff that we saw at this time last year as I also said. But when you look at the curve we're pretty close sitting at the same level that we actually were at this time. I think we have a few new dynamics this year. TMX is up and running and it continued to increase the loadings this month as well. The last month in October I think they were up to 24 loadings. I think the capacity is just over 30 loadings a month. We see more of the voyages going to Asia. I think nine of the cargoes went to Asia direct and four of them went down and did an STS. So that's all helpful obviously to the volume. 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 and being global and being positioned to benefit from them. So we see variability but there's absolutely a pulse in the market I can tell you.

Very good. Great. Thanks, Kenneth, Thanks, Brody. I'll turn it over

And the next question will come from Ken Hoexter with Bank of America.

Good morning. I would like to revisit the earlier question. If you are acquiring all of the assets and you mentioned that Teekay TNK resembles what Teekay used to be, could you explain why the dual listing still exists? Will we see more consolidation in that area?

Yes, Teekay has been listed since 1995, which has given us a historical ownership structure that dates back to when we established our subsidiary companies. We have been gradually evolving this structure. While it may seem unusual to have two listed companies invested in the same underlying business, we believe we have effectively highlighted the value in TNK, which we expect will translate to Teekay in the future. The idea of merging the two entities is something we may consider down the line, but for now, maintaining two strong balance sheets provides us with flexibility. In this market, having one robust balance sheet is advantageous, but having two is even better. As mentioned earlier, we have a legacy ownership structure where TNK has always been controlled by Teekay, and we appreciate that arrangement as it has served us well over the years.

I understand, Kenneth, but it seems to remind me of past concerns regarding the subsidiary companies being the controlled entities with limited capabilities. For instance, one stock is up 13% while the one sending resources to the subsidiary is down at least at the morning open. It’s a bit confusing why both are needed if everything operates within one entity. However, I believe we will understand it over time. Does this indicate the end of Teekay's focus on other sectors or investments? Initially, you aimed for a balance sheet that would allow for investments in LNGs, FSRUs, and shuttle tankers. Will the focus now be solely on crude tankers and remain with TNK?

I think you may have asked Kevin that question previously. What's important about our company is that we are an integrated shipping firm. This means we handle both technical and commercial management in-house and maintain a global presence. We believe this adds value and distinguishes us in the current market. Additionally, this capability allows us to expand into other sectors. For instance, if we chose to operate conventional shipping assets such as product tankers, MRs, or VLCCs, we could do so, although that's not our current focus. It's crucial to note that we have the capacity to make that move, as we've historically leveraged our internal capabilities to enter new sectors. Over the last two years, Teekay Corp. has explored various sectors in a dynamic shipping market. The segment we've been most interested in, and have invested heavily in, is crude oil tankers, which has performed exceptionally well. Currently, we still prefer this profile and appreciate the cash flow we generate from TNK. Although we are not satisfied with current share prices, we believe their valuation represents good value, which is why we have been buying back our stock and acquiring more TNK stock. Ultimately, our goal is to create long-term value using our in-house skills to serve our customers, and that remains our guiding principle.

What was viewed as the advantage for TNK in selling the Australian asset down to TNK? And was an independent review I presume it was right of independent directors done on the valuation?

Yes, the timing was essential for us to finalize our streamlining efforts. We have consolidated management within one of the companies. You could say that Teekay is evolving into more of a holding company. It was crucial for us to determine a valuation that was balanced, and I believe we have achieved that. There was a review conducted by the TNK Board as well as independent directors regarding the fairness of this decision. Additionally, we obtained an external valuation of the company. It was important for us to pinpoint a valuation that was precisely balanced, and that is exactly what we have accomplished.

Wonderful. On the business Kenneth you mentioned the move to balance spot or future the potential to look at some more time charter outs and balance when the right time in the market is away from spot. Is that something you think we'll 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 move? I think that's a little bit different than maybe Kevin had talked about in the past.

Yes. I mean, obviously, every quarter we're one quarter further into the cycle, right? So, but I think sitting here at the winter and looking at the liquidity and the number of time charters that are being done, I think, we're comfortable with the continued exposure to the spot market. But of course, selectively, I mean, yes, it will make sense. There isn't a ton of liquidity. There aren't a lot of one, two or three-year deals that are being done on time charter at the moment. So I think we just need to get a bit further into the winter to see how those opportunities will arise. But it's been a fairly quiet Q3 when it comes to opportunities in that respect but it's something we're looking at constantly.

On the flip side, do we keep watching the time charter-ins fade away then if we're not seeing much time charter activity?

Yes, that's also an option at our price point. I believe we are at a point where everyone is closely observing the market equilibrium. This is an interesting phase, and we are considering that if the levels are right, we would sign some vessels for time charter, although I can't provide the exact number right now. At the same time, due to our very low cash flow breakeven, we are also able to maintain our exposure, as we expect a healthy winter ahead and will evaluate how next year unfolds.

Great. Appreciate the time and thank you.

Thanks.

And that does conclude the question-and-answer session. I'll now hand the conference back over to the company.

Well, thank you very much for listening to our earnings call today. We look forward to reporting back to you next quarter. Have a great day.

Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.