Teekay Tankers Ltd. Q1 FY2021 Earnings Call

Welcome to Teekay Tankers Ltd's First Quarter 2021 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. Operator provided instructions. As a reminder, this call is being recorded. And now for opening remarks and introductions, I would turn the call over to the company. Please go ahead.

Before we begin, I'd like to direct all participants to our website at www.teekaytankers.com where you'll find a copy of the first quarter 2021 earnings presentation. Kevin and I 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 first quarter 2021 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, Stewart. Hello everyone. Thank you very much for joining us today for Teekay Tankers' first quarter 2021 earnings conference call. I hope 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 for Teekay Tankers. Moving to our recent highlights on slide three of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $16 million during the first quarter, an increase of $6 million from the fourth quarter of 2020. We reported a total adjusted net loss of approximately $22 million or $0.65 per share during the first quarter, an improvement from an adjusted net loss of $41 million or $1.21 per share in the fourth quarter of last year. Our improved results are largely due to higher spot tanker rates during the quarter and supported by revenues from several lucrative fixed-rate charters secured during periods of market strength, rates substantially higher than first quarter spot rates. Despite a challenging quarter, we have maintained our strong balance sheet with liquidity of $372 million and net debt to capitalization of 32% at the end of the first quarter of 2021. Our strong financial position has enabled us to continue reducing our overall cost of capital on an opportunistic basis. In March, we exercised additional purchase options on six vessels currently on sale leasebacks, bringing our total purchase options exercised since November 2020 to eight vessels; these transactions are expected to close in May and September. Lastly, while improved relative to last quarter, tanker market weakness continued into the first quarter due to lower oil demand as a result of the ongoing impact of the COVID-19 pandemic. However, midsize tanker rates did see a spike in March as a result of bad weather and the Suez Canal blockage. Looking ahead, although we expect near-term headwinds with the continued impact of COVID-19, we are seeing early positive signals that indicate a market rebound starting in the second half of 2021 which I will touch on in more detail later in the presentation. Turning to slide four, we look at recent developments in the spot tanker market. Spot tanker rates remained generally weak during the first quarter as COVID-19 continued to have a negative impact on tanker demand. Global oil demand fell by around a million barrels per day in Q1 due to a resurgence in COVID-19 cases over the winter months in several countries. OPEC continued to limit oil production during the first quarter, with Saudi Arabia implementing an additional voluntary supply cut of a million barrels per day from February in response to weaker oil demand. Finally, the first quarter saw a further 4.5 million deadweight tons of tankers returned to the trading fleet from floating storage, adding to available fleet supply and worsening the supply-demand imbalance. While overall the first quarter was weak in terms of spot rates, we did see some sharp spikes during the month of March as shown by the chart on the right. Most notably, Aframax rates reached $20,000 per day on some trade routes. These spikes were driven by bad weather in the U.S. Gulf and Mediterranean, and the blockage of the Suez Canal towards the end of the month, both of which caused disruption and boosted rates for a short period of time. Although these temporary disruptions have now ended and rates have reduced at the start of Q2, it is encouraging to see a positive rate reaction to these factors in what was otherwise a depressed quarter for rates. That is perhaps a sign that the worst of the market may now be behind us. Although spot tanker rates were weak during Q1, Teekay Tankers managed to mitigate the impact through its fixed-rate time charters as shown by the chart on the left. This is particularly true for our Suezmax fleet, where our fixed-rate charters lifted overall Suezmax earnings to around $16,800 per day versus spot earnings of around $10,700 per day. Turning to slide five; we will provide a summary of our spot rates in the second quarter to-date. Based on approximately 55% and 49% of spot revenue days booked, Teekay Tankers' second quarter-to-date Suezmax and Aframax bookings have both averaged approximately $10,500 per day. For the LR2 fleet, which are predominantly trading dirty, based on approximately 49% of spot revenue days booked, second quarter days bookings have averaged approximately $11,900 per day. Turning to slide six. We look at some of the key indicators which we believe point towards a future tanker market recovery. First, we acknowledge that there is still uncertainty in the near term due to the ongoing COVID-19 pandemic and its potential to further disrupt oil demand as new outbreaks occur. This has been highlighted recently by a devastating outbreak in India and rising case numbers in several other countries. First and foremost this is a human tragedy; the increase in cases also has the potential to lower oil demand and possibly oil imports to the detriment of spot tanker rates. However, if we look further ahead to the remainder of 2021 and beyond, there are a number of reasons for optimism as several of the key indicators that we track have improved since the start of the year. Firstly, the global economic outlook is improving with the IMF recently increasing their forecasts for global GDP growth in 2021 from 5.5% to 6%. As a result of this revised outlook, the IEA has increased its forecast for global oil demand in the second half of the year by 0.3 million barrels per day to 98.9 million barrels per day. More importantly for the crude tanker market, the IEA expects crude throughput at refineries to increase by 6.6 million barrels per day between April and August of this year, which should create significant crude tanker demand. Oil inventories, which increased significantly in the second half of 2020, have been drawn down significantly due to the production cuts of the OPEC+ group of oil producers and are now almost back to the five-year average. The combination of normalized inventory levels and rising oil demand as we move through the second half of 2021 should result in more oil production, with OPEC+ indicating their intention to return 2.1 million barrels per day of supply between May and August. In order to meet rising demand, we believe that further such increases will be necessary and it is this additional production that should help rebalance tanker supply with demand, increasing fleet utilization and helping to kick start a tanker market recovery. The fleet supply side continues to look very positive with the order book as a percentage of the fleet currently at approximately 8%, very close to historic lows and well below the long-term average of around 20%. Rising new-build prices spurred by an increase in steel prices and a very large amount of ordering in the container ship sector since the start of the year are acting as a deterrent to tanker new-building orders. We've also seen a modest increase in recycling numbers since the start of the year. We would look for a more substantial increase in demolitions if, or more likely when, sanctions on Iran are lifted and the fleet of older ships currently serving sanctioned trades are phased out. Overall market conditions indicate very low levels of fleet growth for the next two to three years which should help facilitate a tanker market recovery once the market starts to normalize and improve. In summary, it appears that we may be past the worst in the tanker market downturn. And although the next few months still appear challenging due to the uncertainties of COVID-19, we are increasingly positive on the longer-term fundamentals which we believe will underpin the tanker market recovery. This belief is already being reflected by the wider market through higher time charter rates and asset values; Aframax values have increased by up to 20% since the beginning of the year. I'll now turn the call to Stewart to cover the financial slide.

Thanks, Kevin. Turning to slide seven, we highlight the company's strong financial position. As Kevin mentioned in his opening remarks, we have maintained our strong balance sheet which provides us with financial strength and flexibility. We have a liquidity position of $372 million and net debt to capitalization of 32% at the end of the quarter. One of our strategic priorities is to reduce our cost of capital. In March, we exercised purchase options for an additional six vessels for $129 million. In total, we have exercised purchase options on eight vessels that are currently on high-cost sale leaseback financings for approximately $186 million, two of which closed in May with the remaining vessels closing in September. We are currently in the process of negotiating term sheets to refinance these eight vessels with lower-cost sale leaseback financings. Lastly, having reduced a significant amount of debt in 2020, our debt repayment profile is very manageable in the coming years with no significant debt maturities until 2024. With that, I will turn the call over to Kevin to conclude.

Thanks Stewart. We'd like to say thank you once again this quarter to all of our seafarers and shore-based staff for their continued dedication to providing safe and uninterrupted service to our customers during these challenging times. As we hopefully move closer to a more normalized world, at Teekay we will continue to focus every day on the safety and well-being of our seafarers as we have done since our inception nearly 50 years ago. Finally, with a strong financial position and high operating leverage we believe that Teekay Tankers is well positioned to weather the current market challenges and benefit from anticipated tanker market recovery. With that, operator, we are now available to take questions.

Thank you. Operator provided instructions. We will take our first question from Jon Chappell from Evercore. Please go ahead.

Thank you. Good morning or good afternoon, wherever you are. First question for you: out of the $186 million of the leases that you were able to negotiate, you said that you're using cash and new sale and leasebacks to pay those off. I understand the term sheets are still in process right now, but roughly how much of new debt do you foresee replacing that $186 million versus current liquidity that you have to do that?

Hi Jon. Yes, we're actually just finalizing those term sheets. So we've got a pretty good handle on that. Out of the $186 million, we will be refinancing $140 million with the new lower-cost sale and leasebacks and using about $45 million of existing liquidity for the remainder.

That's helpful. And then I know once again you negotiate the terms but just roughly speaking, when you see a new sale and leaseback being replaced with a sale and leaseback immediately, my mind goes to why don't you just use your existing undrawn facilities, because the leasebacks are still higher cost. Is there a rough estimate of what the spread benefit will be, so to speak? The amount of basis points you'll save from the new facilities versus the average of the eight that you'll be replacing?

Yes. So on the portion we're pulling from a revolver, there are substantial savings on the spread for the $140 million. The spread is about 5%. If we fix that out it is actually larger than that if we allow it to float for now. So it's actually very substantial savings. We're probably looking at a minimum of $8 million in 2022 in interest savings from doing that.

That's huge. And then finally Stewart, just refresh my memory: I think you assess assets every quarter, but after these eight, you still have some sale and leasebacks from a prior time with a higher level of interest rates. What's the timing on potential expiration or renegotiation for the remainder of those?

Yes. So we still have six vessels after these ones redeliver; we'll have six vessels on sale leaseback arrangements that we had done a few years ago. The interest rate on those is quite a bit lower, more in the 6% range. The total amount outstanding on those is about $160 million. It's not something that we're focused on immediately. But as the market turns and we start generating more cash flow we'll look to continue to try and bring down our cost of capital. At the moment, we don't expect to do anything with those vessels in the near term.

Okay, that makes sense. Thanks, Kevin. Thanks, Stewart.

We will now take our next question from Randy Giveans from Jefferies. Please go ahead.

Gentlemen, how's it going?

Good. Thanks, Randy.

Very well. Excellent. Two questions for me. First, how do you view the outlook for product tankers compared to crude tankers at this point in the cycle? And are you using this maybe soft patch to clean up some of your LR2s that were trading dirty to start treating clean again in the near term?

Yes. We have nine LR2s, the bulk of which have been trading dirty purely because of the returns we're getting in comparison. We have seen a little bit more volatility in LR2 trades over the last six months. That prompted us a few months back to look at maybe changing over one or two into the product trade. Since then the trade hasn't really picked up and I think LR2 returns on a round-trip basis aren't necessarily as good as some of our U.S. Gulf returns on the crude side. At the moment, we've got two ships that are trading clean primarily in the Far East. For the time being that's about as far as we're going to go until we start seeing more definitive green shoots in the product space. Overall, you still have large inventories on the product side in Europe that I think will be a drag. Our view is the vast majority of our exposure will remain in the crude space, and we are confident the fundamentals are lining up for that over the coming quarters.

So you're not necessarily a believer that refined products will lead, with all of the refinery dislocation and increased demand for jet fuel, prior to an inflection in crude demand?

No, I mean, the product trade has often been expected to lead but it hasn't always delivered as and when people thought it would. We do have exposure: we can increase it from two ships to nine. But at this point in time we're not seeing that. As a result we're trying to make as much money in this weak market as we can, and today for us that is trading our ships dirty.

All right. And then second question: you mentioned your recent time charters helped buoy your Suezmax rates during the patch in the first quarter. Any further appetite for signing some six-month to one-year time charters to kind of stabilize cash flow over the next uncertain period?

In terms of putting our ships out, we look at it opportunistically. It's about finding the right customer, the right ship in the right position to be able to pull the trigger at the right number. So far we haven't seen numbers we'd be willing to lock in for 12 months. There may be some opportunities within regional fleets to put out for six months, but it's not something we plan to do systematically. A lot depends on traders who come up with positions they need to fill and we look at those offers on a case-by-case basis.

Got it. That's fair. All right. Well, I think that's it for me. Thanks so much.

Thank you, Randy.

We will now take our next question from Ken Hoexter from Bank of America. Please go ahead.

Kevin, Stewart, Christian, good afternoon. Maybe just a question for Christian or Kevin if you want to chime in: how much more is left in storage? You talked about a bit of the overhang caused by a couple million barrels still coming out of storage. Maybe talk to us from your view of what's still left to impact those rates?

Yes. Hi Ken, it's Christian here. In terms of the land-based storage it does seem like we're pretty much back to five-year averages now. If you look at the EIA report that came out yesterday, they said that in the OECD inventories are only about 2 million barrels above the five-year average, compared to about 250 million barrels in the middle of last year. So certainly land-based storage is looking like it's back to normal levels. On floating storage, that's also almost back to normal levels as well, certainly in the midsize tanker segment because there aren't really any Aframaxes or Suezmaxes doing storage contracts beyond what we would normally expect in a typical market. There may be 10 to 15 vessels that could still be in storage and might come back, but by and large I think we're almost at a normal market now in terms of inventories, which of course is positive because it means as demand recovers through the second half of this year it will create a deficit of oil that needs to be moved. We certainly expect OPEC will increase production through the back end of this year over and above the 2.1 million barrels per day that they've already pledged between now and July, which should be positive for tanker demand.

So then with that setup sounding positive, talk about the spot rate softness you've seen in Q2 relative to what you've booked so far. Do you think we see downward pressure on what you booked through May and June or are we finding a floor? Maybe just talk about that relative to what you got?

I think we've found the floor, to be honest. You never know in tankers what disruptions might occur — we saw in March a big spike for Aframaxes caused by weather and the Suez Canal incident for about a 10-day period. But I think these levels are where we are likely to be. One of the challenges over the last six months is that while we've seen more fixing activity in Aframax and Suezmax markets, that activity was largely negated by the unwinding of floating storage. Now that floating storage levels are close to normalized, if activity continues to increase and we see more Russian barrels coming out of the Black Sea and the Baltic, that should help Suezmax and Aframax rates in the Atlantic. It might help a little bit on the quarter, but it's too early to tell. It won't miraculously improve overnight, but we could see steady improvements going forward.

Sorry for the minor one for Stewart: voyage expenses were elevated in the first quarter given the increase in spot days. Any thoughts on that going forward? Obviously last year was different given COVID impacts. Should we expect similar levels on expenses?

Yes. Voyage expenses are correlated with the number of spot days that we have. There's also the re-delivery of our time charter fleet: as those vessels come back into the fleet we start incurring voyage expenses on those. So that's a normal movement you would expect. We have a small out-charter fleet now, so voyage expenses should be relatively stable, subject to movements in fuel costs.

All right. Just wanted to see if there was anything different in that. And then Kevin, on the fleet size: do you feel you've got the scale you want? As markets rebound and asset values go up, might you sell anything or buy? How do you think about fleet scale into a rebound?

I think Teekay Tankers today is very well positioned with a 50-ship fleet that will be increasingly weighted towards the spot market as recent time charters roll off. Whether we add exposure through time-charter additions or asset purchases, we'll have to see what opportunities present good value. Asset prices have moved up quite rapidly this year, so we're not going to reach to add ten ships at current prices — it's not necessary with our 50-ship fleet and wouldn't be prudent. We would consider one-off opportunities where we see a deep discount or good value. On the flip side, with asset prices rising, we could be sellers and transact on older vessels if we get the right price and can unlock value. We're agnostic: both buyers and sellers, and we'll remain flexible and assess opportunities case by case and transact only when we see clear value.

Do you see a greater chance of upside than downside, implying more opportunities?

I think the fundamentals point toward improvement. That said, the pandemic remains uncertain, so we have to be prudent and not dive in immediately. As I said earlier, it pays to be cautious. Our outlook is for improvement into the back half of this year and into 2022 and 2023, so we expect opportunities to come up and we'll evaluate them when they do.

Appreciate it. Kevin, Stewart, Christian, thank you for your thoughts and time.

We will now take our next question from Magnus Fyhr from H.C. Wainwright. Please go ahead.

Thank you. Good afternoon. Just a follow-up question on Ken's question. You spent the last couple of years strengthening your balance sheet. Can you talk a little bit more about how you feel about fleet renewal over the next couple of years? You have a strong cash position and stricter upcoming emissions targets. I'm curious how you think about that going forward.

Yes. As I said earlier, we're very comfortable where Teekay Tankers stands today. Our average fleet age is 12 years, which is manageable. We have good franchises in the U.S. Gulf and Far East where we can trade younger and older ships alike. Over the years we've invested in our fleet and spent money on improvements to make them more fuel efficient, so the upcoming 2023 regulations don't scare us. We've made improvements in reducing emissions. That said, every year the fleet ages and we'll have to start investing in newer tonnage eventually. We don't think that's a decision to rush into now. There's uncertainty about which technologies and fuels will dominate; technology is developing rapidly and it may be prudent to wait rather than commit now to a new propulsion technology that could be superseded. We expect oil companies and charterers to drive the transition for new technologies, but as Teekay we believe there will still be demand for well-maintained conventional Aframaxes and Suezmaxes operated by reputable companies.

Do you feel that the oil companies have to take the lead there and that the prudent way would be to build against time charters?

I think you've seen Shell and Total and some others secure LNG-propelled tankers against time charters. That gives shipowners confidence to invest in specific technologies. But there's still a risk: technology for future fuels is developing rapidly; LNG propulsion may not be the only or best long-term answer. There may be cheaper, more efficient alternatives that come along. So while oil companies will likely drive adoption of new technologies, we believe there will remain a market for quality, fuel-burning vessels operated by experienced owners for the foreseeable future.

And are you looking at any potential new designs? What's the delivery timeframe right now if you were to order a Suezmax or Aframax vessel?

If you're looking for a quality yard in South Korea or China, you're looking at 2024 second-half deliveries. There may be slots available in 2023 but generally at second-tier yards. Christian can provide more detail on specific timing and availability if needed.

Okay, great. That's it for me. Thanks.

Thanks, Magnus.

It appears there are no further questions at this time. I will pass the call back to the company for any additional or closing remarks.

Thank you for joining us today. We hope that you and your families remain safe and we look forward to speaking with you next quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.