Teekay Tankers Ltd. Q2 FY2020 Earnings Call

Welcome to Teekay Tankers Limited Second Quarter 2020 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. 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.teekaytankers.com, where you'll find a copy of the second quarter 2020 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 the second quarter 2020 earnings release and earnings presentation available on our website. I’ll now turn the call over to Kevin Mackay, Teekay Tankers' President and CEO to begin.

Thank you, Ryan. Hello everyone. Thank you very much for joining us today for Teekay Tankers' second quarter 2020 earnings conference call. And I hope that you and your families are all safe and healthy. Joining me on the call today are Stewart Andrade, Teekay Tankers' CFO; and Christian Waldegrave, Director of Research. Before we review our results, I would like to say thank you again this quarter to all of our seafarers and shore-based staff for the continued extraordinary efforts in bringing energy to the world with Teekay spirit during the COVID-19 pandemic. The unprecedented impact of COVID-19 continues to be a major area of focus for us. Unfortunately, we have thus far successfully navigated the evolving logistical and regulatory challenges with minimal impact on our operations. Moving to our recent highlights on slide 3 of the presentation, Teekay Tankers generated total adjusted EBITDA of approximately $124 million during the second quarter, an increase of $88 million from the same period of last year. We reported adjusted net income of approximately $81 million or $2.39 per share in the second quarter, up from an adjusted net loss of $12 million or $0.36 per share in the second quarter of 2019. Teekay Tankers has experienced a strong first half of 2020, reporting total adjusted EBITDA of approximately $280 million, an increase of $180 million over the same period of last year, and adjusted net income of approximately $191 million or $5.66 per share, compared to approximately $3 million or $0.00 per share in the first half of 2019. Teekay Tankers' first half of 2020 annualized adjusted earnings per share yield of 71.2% was among the highest in our industry, clearly demonstrating the earnings power of our business. We have continued to strengthen our balance sheet this quarter with strong free cash flow from operations of $126 million and the opportunistic sale of a noncore asset. This contributed to a net debt reduction of over $180 million or 25% to $549 million and increased our liquidity position to $468 million as of June 30. Our net debt to total capitalization declined to 31.5% at the end of June, compared to 40% at the end of Q1 this year. Further strengthening our balance sheet post Q2, we received the final payment of $12.6 million in July from the previously announced $27.1 million sale of our STS support business and recognized a gain on sale of $3.1 million in the second quarter. In addition, in August, the company secured a three-year $67 million term loan to refinance the debt facility secured by four Suezmaxes that was scheduled to mature in 2021 at an attractive rate of LIBOR plus 225 basis points. With the completion of this loan, the company does not have any debt maturities until 2023, further improving our financial stability. The health and safety of our crew and shore staff remains paramount. Strict measures have been implemented on all of our ships to protect our seafarers. To date, we have had no cases of coronavirus reported onboard our vessels. The maritime industry has experienced significant challenges regarding crew changes due to issues related to travel restrictions, flight availability, visa applications, and restrictions by many ports in allowing crews to disembark from vessels. Despite these challenges, I am pleased to report that we have safely changed out a large portion of our seafarers on our vessels. However, approximately 36% of our overdue crew members are yet to be relieved. We continue to work diligently with both industry and intergovernmental organizations to tackle this challenge and relieve our remaining overdue colleagues as soon as possible. I am truly proud of how our seafarers and onshore colleagues have responded to ensure crew rotations are completed safely and seamlessly with no interruption to the service we provide to our customers. In the freight market, crude tanker spot rates for the second quarter remained firm and the last three quarters average spot rates were the highest in the past 12 years. Entering the third quarter, our booked spot rates to date have weakened, which I'll touch on in more detail in the next slides. The impact of this recent weakness in the spot market is mitigated somewhat, however, by our well-timed fixed-rate contracts secured over the last few months at very attractive rates, which have reduced the free cash flow breakeven for our spot fleet to approximately $12,700 per day through to mid-2021. We currently have 13 vessels on fixed-rate charters at an average rate of $39,100 per day. Turning to slide 4, we look at recent developments in the spot tanker market. As mentioned, Q2 saw the third consecutive quarter of strong spot tanker rates. Rates were particularly firm in the early parts of the quarter as elevated crude trade volumes due to the short-lived oil price war between Saudi Arabia and Russia led to strong tanker demand. Floating storage also gave support to rates as a significant mismatch between elevated levels of global oil production and depressed oil demand resulted in a large surplus of both crude oil and refined products. Onshore storage filled rapidly and with the crude oil futures curve moving into steep contango oil moved into floating storage, peaking at well over 10% of the trading fleet in mid-May. The market landscape shifted midway through the second quarter and a weaker spot rate environment has emerged in recent weeks, driven by lower global oil production and the return of some ships from floating storage. OPEC and its partners implemented record oil production cuts of 9.7 million barrels per day between May and July, with Saudi Arabia, the UAE, and Kuwait adding further cuts of 1.2 million barrels per day during June. Compliance with these cuts has been relatively high and has led to a significant reduction in crude trade volumes. Oil production has also declined in non-OPEC countries, due to the impact of weaker oil prices, with total global oil production falling by close to 14 million barrels per day between April and June. In addition, floating storage has come off from the record highs in May, which has released some ships back into the trading fleet. Taken together, a reduction in trade volumes coupled with ships returning to active trading has put pressure on crude tanker spot rates during the latter part of the second quarter, and this weakness has continued into the early part of Q3. Turning to slide 5, we give a summary of our fixed-rate charters and our spot fixtures in the third quarter of 2020 to date. Teekay Tankers has been proactive in managing the fleet, locking in attractive fixed-rate charters during periods of significant strength in the tanker market over the past few quarters. We currently have 23% of our fleet on fixed-rate contracts at an average rate of $39,100 per day. Moving to our spot fleet, based on approximately 57% and 51% of spot revenue days booked, Teekay Tankers' third quarter-to-date Suezmax and Aframax bookings have averaged approximately $24,800 and $15,600 per day respectively. While these rates have weakened from the last quarter, spot rates are higher than the third quarter of 2019, indicating stronger underlying supply and demand fundamentals. For our LR2 fleet, which are all currently trading in dirty, based on approximately 42% of spot revenue days booked, third quarter-to-date bookings have averaged approximately $14,400 per day. Combining our fixed-rate charters with our spot fixtures so far in Q3, our Suezmax fleet has 73% of its Q3 revenue days fixed at $33,500 per day. Our Aframax fleet is 56% fixed at $17,600 per day and our LR2 fleet is 48% fixed at $17,400 per day for the third quarter of 2020. We have intentionally scheduled the majority of our dry dockings in the third quarter, which has allowed us to capitalize on the strong earnings environment in Q1 and Q2 of this year while removing vessels for maintenance during the current weak rate environment that we're experiencing now. Further details of our fixed-rate charters and our docking schedule can be found in the appendix of the presentation. Turning to slide 6, we look at some of the imposing supply and demand factors, which will impact the tanker market over the next 12 to 18 months. After declining by over 20% year-on-year in the second quarter, global oil demand is projected to rebound during the second half of the year and to continue its recovery during 2021. According to IEA, global oil demand is expected to increase by 14 million barrels per day between Q2 and Q4 of this year, and refinery throughput is expected to increase by 9 million barrels per day over the same period. This should be positive for tanker demand that we must caveat this view by acknowledging the high degree of uncertainty associated with all demand forecasts in the current environment, with much depending on how various countries and regions manage to contain the spread of COVID-19 over the coming months. Global oil production is also at a turning point, with production expected to increase during the second half of the year as both OPEC and non-OPEC countries return supply to the market. The OPEC+ group is set to return 2 million barrels per day of production from August onwards, though this may not be fully translated into additional export volumes in the near-term, as Saudi Arabia has pledged to keep its extra production for domestic use during the summer months when local power demand is higher. Non-OPEC oil production could also start to rebound in the coming months, as global oil prices stabilize around $40 per barrel. Although oil market fundamentals are improving, we expect the coming months will be challenging ones for the tanker market, as vessels return to active trading from floating storage. As shown by the chart on the right, over 150 tankers of Aframax size and above remain in floating storage. Although this is a decline from the peak in mid-May, it still represents approximately 7% to 8% of the fleet. The contango in crude oil prices no longer supports floating storage, and emerging global oil supply deficits are expected to lead to a drawdown of storage volumes from Q3 onwards. As such, we expect a significant portion of the floating storage vessels to return to the trading fleet by the end of the year, which will add to fleet supply. Overall, we expect a weaker tanker market during the second half of 2020, especially in comparison to a strong first half we just enjoyed. There is, however, the potential for some volatility to occur during the fourth quarter, as seasonal weather disruptions in choke points such as the Bosporus Canal provide logistical constraints in certain regions. Turning to slide seven, we look at the positive fleet supply fundamentals. New tanker ordering remains very low due to a more restrictive financial landscape than in the past and uncertainty over the impact of upcoming environmental regulations on the choice of future vessel propulsion systems. This lack of contracting has led to a shrinking order book, which currently stands at a 24-year low of just over 7% of the existing world fleet. To put this into context, during the past two market cycle peaks in 2008 and 2015, the order books stood at 50% and 20% of the fleet respectively. Further to that, the tanker fleet is also aging. There are currently 115 mid-sized tankers which are aged 20 years old or are due to turn 20 over the next two years. This compares to an order book of 140 vessels expected to deliver over the same time frame. Given that most tankers leave the international trading fleet at age 20, we anticipate minimal net fleet growth in Suezmax and Aframax fleets over the next two years. The same chart shows there are 255 vessels in the 15 to 17-year age bracket, which will need to go through their 17.5-year intermediate survey over the next couple of years. With the additional CapEx that will be needed for the installation of ballast water treatment systems, we may see some additional vessels in this age group also being scrapped in anything but a strong market, further offsetting the limited number of vessels delivering into the fleet. We must note that so far this year, scrapping activity has been low due to a combination of stronger freight rates in recent quarters, low scrap prices, and the shutdown of many scrap yards due to COVID-19. However, we are starting to see shipyard activity returning, which in combination with a weaker freight environment could lead to increasing levels of tanker scrapping as we close out 2020 and get into 2021. In sum, the tanker market looks set for a more challenging period in the coming months, following a very strong first half of the year. However, we remain encouraged by the tanker fleet supply fundamentals, which are far more favorable than we've seen in previous market cycles. I'll now turn the call over to Stewart to cover our financial slide.

Thanks, Kevin. Turning to slide eight, we highlight the strengthening of our balance sheet. Over the last 12 months, Teekay Tankers generated $381 million of free cash flows from operations and received $109 million in proceeds from asset sales, which has transformed our balance sheet, creating a strong financial platform for the company. I'm pleased to report that net debt has decreased by $445 million or 45% to $540 million and our net debt to total cap has reduced by nearly 20% to 31.5%. Further, our liquidity position has improved by $348 million to a total of $468 million at the end of June. As mentioned previously, we currently have 23% of our fleet on fixed-rate charters, whereas only 2% of our fleet was on fixed-rate charters in the second quarter of 2019. This increase in fixed-rate contracts at levels well above the current spot market, combined with our debt reduction, has lowered the free cash flow breakeven of our spot fleet through the end of Q2 2021 to approximately $12,700 per day. Creating shareholder value through increased net asset value has been and continues to be a strategic priority. Our focus on directing cash flow generation and proceeds from asset sales to debt reduction, combined with a time charter portfolio that is well in the money, has increased our net asset value by $10 per share to our current estimate of $28 per share. With our low free cash flow breakeven, we are well-positioned to continue creating shareholder value throughout a wide range of possible near-term market conditions. In addition, Teekay Tankers has secured a new three-year $67 million loan to refinance four vessels at an attractive LIBOR rate of LIBOR plus 225 basis points. With the completion of this loan, we do not have any debt maturities until 2023, further improving our financial resilience during these uncertain times. Further details of our scheduled debt repayments and maturities are in the appendix of this presentation. With that, I will now turn the call over to Kevin to conclude.

Thanks, Stewart. In closing, I am proud of our team for continuing to execute despite the unprecedented global events we're currently experiencing. Commercially, we have generated significant cash flow from our spot fleet while also capitalizing on a strong market by securing fixed-rate income over the next several quarters for 13 vessels at near peak time charter rates. Operationally, we have successfully focused on the safety and well-being of our seafarers and performing crew changes with the nearest practical opportunities, all the while continuing to deliver Teekay's high-quality service to our customers. Financially, we have transformed our balance sheet over the last 12 months and built a resilient financial position while creating significant shareholder value. With a strong financial foundation, a low free cash flow breakeven, and our mid-sized fleet profile, we believe that Teekay Tankers is well-positioned to continue creating value even in these unprecedented and uncertain times. With that, operator, we are now available to take questions.

Certainly. Our first question comes from Jon Chappell from Evercore ISI. Please go ahead.

Thank you. Good morning or good afternoon, guys. Kevin, first question for you, on slide 7 you have 370 vessels that are 15 to 20 years of age. By my math, you have about 3.5% of those yourself. So as you continue to work away and accelerate the debt paydown, what's your appetite? And really what's the appetite of the market to dispose of those 2003 to 2006 build ships to help you get to your target faster?

Yeah. I think it's a good question. Some of our fleet is at the latter end of their life, although we are confident, and we would likely, given the market, continue to trade those ships out to their four special before probably scrapping. But I think as we look at it today, the asset market has obviously been a lot quieter over the last month or two than what we saw earlier in the year when we executed on the four older Suezmaxes. So as we look forward, I think as we get more visibility on COVID and how long that's going to be with us, as oil demand returns to something closer to normalcy, I think you'll see the secondhand market start to pick up. And in the meantime, we will continue to look for opportunities. And if we can get the right kind of number for those assets relative to treatment in the spot market, if it continues to be weak then we'll look to sell those. So I think it will take some time before the attraction in the second-hand market is really there for assets given the weakness we're seeing in the spot market.

All right. That makes sense. And then when you think about the cash flow that you are still generating helped by the time charters, if I look at your debt repayment schedule now with the balloons pushed back to 2023, it looks like you have about $170 million of non-balloon payments due over the next 3.5 years. Is that a target that cash flow from operations you would like to whittle away before there's any thoughts of other uses of cash? Or could you even pull some of the balloon payments forward? I guess some of your peers have even acknowledged a possible zero net debt situation. Is that an optimal balance sheet for you? Or how do you think about the cadence of those pay downs?

Hi, Jon, it's Stewart here. So, I guess we have the opportunity; A, to pay down more on the main corporate revolver, and we can prepay those amounts so we can accelerate those payment schedules. As you may recall, we also have sale-leaseback purchase options, which there's some more expensive debt, which we want to exercise to reduce our cost of debt. So that's another area that we can make those payments prior to the maturities.

And if I can just follow-up with you Stewart just my last one then. With those expensive lease payments, you guys have accomplished so much in the first six months of this year and you're in a much better position now. However we've obviously left the peak part of the market and there's a bit of uncertainty. What's your ability, as you sit here today, with basically five months left in the year to actually exercise some of those lease repayments?

Yeah. So the more expensive leases, the next option declaration date on the more expensive leases comes up toward the end of this year and that would be for a purchase that we would make in May 2021. So, we'll have a lot more visibility in terms of how the second half of the year has gone and our outlook for 2021. But given our current financial position and that those first options being about $60 million to exercise, I think there's a pretty good chance that we'll be in a position to exercise those. And of course, we do have the option to either exercise them fully for cash or to refinance them with traditional bank debt as well to bring down the cost. So, we have a couple of different ways we can go about doing that.

Okay, great. Thanks Stewart. Thanks Kevin.

Thank you.

We'll take the next question from Ken Hoexter from Bank of America.

Hey, good afternoon. Kevin or Stewart, could you share your views on the impact of storage returning? What are your thoughts on how this might affect market rates, especially since you mentioned most of that should be resolved by the end of the year? Can you elaborate on how this will influence spot rates?

There are many factors that influence where spot rates will go and what affects them. As I mentioned earlier, currently around 7% to 8% of the fleet that is Aframax size or larger is in storage. If all of those vessels were to return to the market today, it would significantly worsen an already challenging market. However, looking towards the latter part of this year, the IEA predicts an increase in oil demand, which may lead to more activity at refineries and higher utilization rates. As we start to bring these ships back from storage into the fleet, there will be a complex interaction between those returning and any rise in demand we observe. But that remains uncertain. As we sit here in August, it's difficult to predict whether this will have a substantial or negligible impact.

Thanks, Kevin. Regarding crew costs, I'd like to understand the significant decrease in voyage costs. Can you clarify how much of that reduction is purely due to the absence of crew travel costs? Also, are there any limitations on the crew since you haven't been able to rotate them? Do you face any constraints, such as overtime or other adjustments, that we should consider moving forward?

Hi Ken, I just want to make sure I got your question right. You are asking about OpEx expenses during Q2 being down?

Yes. Yes. Because I mean obviously we had a huge reduction in voyage cost, right? So, I just want to understand what of that is. Is that just the lack of crew movement? Is there something else that might maybe there was a focus on cost reduction that you did internally to try and understand.

The voyage expenses have led to crew costs being included in OpEx. We experienced a reduction in OpEx this quarter, partly because we sold the STS business in April, which means we didn't incur a full quarter's worth of OpEx costs associated with that business. On the voyage expense side, the changes reflect fluctuations in fuel costs and our decision to time-charter several vessels. By doing so, we avoid incurring operating expenses and voyage expenses tied to bunkers and other related costs. Consequently, we have a smaller spot fleet.

I'll meet there. It's excellent. To follow up on Jon's question, as you evaluate your assets, are you indicating that the market is essentially closed regarding the sale of additional assets? Or if interest rates begin to rise, would you consider selling further assets to reduce debt? Or are you satisfied with the current state of the fleet?

The S&P market has been relatively quiet, with only a few sales reported, primarily involving a couple of Aframaxes. One of the challenges everyone is currently facing with potential sales is the difficulty in handing over vessels due to crew change restrictions in many regions. This situation is creating a limit on activity, and there is a general sense of uncertainty. Many owners and prospective buyers are trying to gauge the market conditions and time their purchases. Consequently, we see a lot of individuals sitting back and waiting, which has resulted in low activity levels. As we approach the fourth quarter, I hope to see improved visibility regarding demand return. If we experience some winter spikes, I believe opportunities will grow as confidence increases, encouraging people to seek assets again. If we receive inquiries about assets before that and the market improves, we will certainly consider actions similar to those taken late last year and early this year, particularly concerning some of the older units.

Thanks.

Thanks, Ken.

We will take the next question from Omar Nokta from Clarksons Platou Securities. Please go ahead.

Hi there. You've clearly highlighted a significant improvement in the balance sheet over the past year, reducing debt significantly and increasing cash and liquidity. You've discussed with Jon and Ken the possibility of selling assets as the S&P market improves. Moving forward, how do you view Teekay’s current position in its business lifecycle and within the tanker industry? We are currently in a challenging period. How do you plan to approach the sale of ships and the potential replacement with newer ones? Additionally, what are your thoughts on fleet expansion from Teekay's current standpoint?

That's a good question, Omar. I think even if we were to sell a few more assets, we still have a rather large fleet and certainly have critical mass in the markets that we want to trade in. So I don't necessarily believe you have to be a lot bigger than where we are or where we have been. It all comes down to what is the best use of your capital? When do you deploy it? Which is the most important part in more areas? So I think as we look at the company today, we're obviously in a much, much better position than what we were 12 months ago, and we've done a lot of good work to build up the strength in our balance sheet. Unfortunately, we're in an environment which is extremely uncertain. So I think to look today at fleet expansions or growth or things like that, I think it's entirely premature. We need to get better clarity on what the future looks like and then start to look at what the best use of our capital is. So I think those conversations we said to the market we're not buyers of ships. I think that remains very much true and will be that case for 2020, definitely. But I think, in terms of where we go from here, we're in a good position. We don't have a brand-new fleet with high costs; we've got a good fleet large capable in the markets we want to play in with critical mass. I think we've got the luxury of time now with our balance sheet strength. We can really sit and try and pick opportunities in terms of what we do with capital allocation when we need to. So I think for the moment, we'll just continue to read the tea leaves and keep our powder dry and ensure that the company remains strong, healthy, and flexible, which is really where you want to be in a tanker company.

Thank you for the clear overview. You mentioned the importance of having a critical mass in the luxury sector and the ability to reassess and reduce some of the older vessels while maintaining your presence. Considering the ongoing uncertainty from COVID and the OPEC+ cuts, how are you approaching capital allocation at this time? Once things stabilize, do you believe that prioritizing shareholder returns or focusing on fleet renewal and growth will come first? Can you share your thoughts on this?

What I can share, Omar, is that we met with the Board late last year to establish our capital allocation strategy for 2020. The primary focus was to direct our free cash flow toward repaying debt, reducing leverage, and strengthening our balance sheet. That discussion took place for 2020, and we will need to wait until the end of the year to engage in further discussions with the Board regarding our capital allocation plans for the following year.

Got it. Understood. Thank you so much.

Thanks, Omar.

The next question comes from Randy Giveans from Jefferies. Please go ahead.

Hi again, how is it going?

Hi Randy.

Good. I just wanted to touch on your quarter-to-date rates. Decent levels, obviously above some of the benchmarks we've been seeing, but also somewhat below your peers. Now, is this due to an over fleet age or something else going on behind that? And then with that, how have the kind of time charter rates responded to the current rate weakness?

Good questions, Randy. I think what you'll find is when all the dust settles and all the reporting is done, there will be some outliers in terms of how they performed during the quarter. And I don't intend to concern too much with what we do quarter-on-quarter, it's more over a period of time to try and understand trends. But I think in Q2, one of the factors that we have seen ourselves in terms of our expectations of what Q2 would be and where we came in at, is a function of the fact that when the market was booming in May and in April, we made the conscious decision to take vessels out of the spot market to secure the long-term fixed income. That we thought we needed when the party was over. And I'm glad that we did it. We've locked in $170 million of forward fixed revenue. But that comes at a little bit of a price, and some of that is that we took ships out instead of doing a spot voyage at $60,000 or $70,000 a day; we secured that time charter and locked in $40,000 to $45,000 a day for the next 12 months. So I think that has factored into our Q2 numbers. But I think really is, in terms of peer comparisons, like I said, when the dust settles, there will be some outliers who had a good quarter, perhaps because they had a larger majority of their fleet open when the market spiked over to the highest points it did. And others will lag slightly behind because more of their ships were tied up in storage or were tied up on demurrage, not being able to access those higher numbers.

Okay. That’s fair.

In response to your second question about the impact of the current market on time charter rates, there hasn't been a significant amount of time chartering recently. We're noticing a considerable increase in interest from both traders and oil majors looking for short-term winter coverage, and some are trying to secure lower time charter rates for longer periods. However, no substantial deals have been finalized yet. Thus, the current time charter market is clearly going to be much lower than the 13 ships we have already set aside, and we have not yet completed any agreements in this environment.

Okay. All right. And I think it's the last question and kind of was answered a little bit in previous questions. But on slide eight, your balance sheet liquidity is rapidly improving. You mentioned you have no plans on asset purchases or even dividends, right, for this year at least, which is understandable. But also on slide eight, you see here that your NAV is $28, right, and your share price is $15. So do you have any plans or authorization to repurchase shares now that your leverage is so low?

Hi, Randy. So we do have a buyback program in place that we had put in place. I think it expires in 2022. But for this year, we are continuing to focus on using our cash flow generation for paying down debt. We do firmly believe the best way to create long-term shareholder value is to do it from a position of balance sheet strength. And I think what we've seen this year and the expected headwinds in the second half of the year have just kind of further underlined our view that we really need to be operating the company from a position of that kind of strength. So our intention for the remainder of the year is to continue doing what we originally announced in November last year, which is focusing on strengthening the balance sheet and creating value for our shareholders through the equity value in the company, which is increasing the NAV.

Got it. All right. Well, that’s it for me. Thanks.

Okay, great.

Thanks, Randy.

Our next question comes from J. Mintzmyer from Value Investor's Edge. Please go ahead.

Hi. Good morning, gentlemen. Congrats on a fantastic quarter and transformation over the past year.

Thank you.

Thank you, J.

So, first question, following a lot of your shipping peers, we've been seeing a lot of fixed-to-floating swaps coming into play at very lowest rates I've ever seen, 0.3%, 0.4%, 0.5% fixed for several years. Your latest filing I've seen, it looks like I saw $50 million as a swap that you did earlier this year. Can you confirm if you've done anything since then? And if there's potential to swap even more bad debt into low-cost fixed instruments?

Hi, J. Yes, good question. We currently have one swap in place for $50 million, as you mentioned. It's important to note that of our total debt, we have over $400 million in fixed-rate lease obligations. Overall, about two-thirds of our company’s debt is fixed rate, with the remaining third being debt that we plan to reduce using the cash flow we're generating. We feel quite comfortable with our situation. However, if we increase our fixed-rate debt significantly, we might risk becoming over-hedged in the coming quarters.

Okay. That makes sense. So the plan would be to attack your lease facilities but like the higher-cost debt and maybe in early 2021 when that option comes available. At that point, you would swap it into traditional bank debt? Am I understanding that correctly?

We will evaluate our options, either exercising them for cash if possible, or refinancing them with traditional bank debt. If we choose to refinance with bank debt, we will then analyze whether to lock in a swap or allow it to float, based on how much debt we've managed to pay down and our outlook on the market.

Certainly. Certainly understandable. Yes, when we look at Slide 8, I think it's just phenomenal to see how you just transform this company year-over-year. And we look at your leverage, right and the leverage has gotten to a point where I think last year you were like 80% debt to assets. And this year you're very close now Q2 close to 40%. And you have liquidity of nearly $350 million. I know you said earlier, just a previous question that you don't want to repurchase shares this year or pay a dividend. You're just continuing this focus. You're going to get the company even cleaner by the end of 2020. But let's just talk conceptually, what sort of leverage would you be comfortable with for the fleet? Is it some sort of band between like 30%, 40%, 50%? Or where do you see yourself for the longer term?

I believe it largely depends on the company's strategy and when we see the right opportunity to reinvest. We need to evaluate reinvesting compared to buying back shares or starting to pay dividends. It's not a straightforward figure; it must be considered in the context of our market outlook, our needs for fleet renewal, and the desire to reward shareholders in the short term with dividends. We need to weigh all these factors. It’s not easy to provide a quick answer, and I think this requires a thorough discussion with our Board. As Kevin mentioned, we will be addressing this towards the end of 2020 as we look ahead to 2021. We do recognize the advantages of buying back shares at a discount to our NAV and understand the potential impact. Therefore, we need to carefully balance these considerations to determine what is best for creating long-term shareholder value.

Certainly. It certainly makes sense. And then with your shares trading where they are, it's to the point where it's nearly $0.50 on the dollar. So as you go into 2021 and you have that option, are you looking at that NAV, right, and at that discount level before considering taking those funds and investing in growth? Because I know a lot of times analysts on the call will say, do you want to grow the company? Or do you want to reward shareholders? But do you agree that you can also grow the company on a per-share basis more accretively through repurchases?

Yes, I believe it's important to evaluate the company on a per-share basis. If you're increasing shareholders' ownership through buybacks, that's a way to enhance their stake. While I may not agree that you're growing the company in the traditional sense, you are definitely increasing shareholders' ownership, which is a significant factor. This is certainly one of the aspects we consider when deciding on capital allocation.

Certainly makes sense. Congrats again on a great quarter and looking forward to next one.

Great. Thank you.

It appears that there are no further questions, and that ends our question-and-answer session for today. I'd now like to turn the conference back over to the company for any closing remarks.

Thank you for joining us today. Please stay safe during this global pandemic, and we hope and look forward to speaking to you next quarter. Take care.

That concludes today's conference. Thank you for your participation. You may now disconnect.