Teekay Tankers Ltd. Q1 FY2026 Earnings Call

Welcome to the Teekay Group First Quarter 2026 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. At that time, if you have a question, participants will be asked to press 1. For assistance during the call, please press 0 on your touch-tone phone. 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 Teekay Group's first quarter 2026 Earnings Presentation. 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 2026 Teekay Group earnings presentation available on our website. Hello, everyone, and thank you very much for joining us today for the Teekay Group's first quarter 2026 Earnings Conference Call. 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 we will cover Teekay Tankers' recent highlights. Teekay Tankers reported GAAP net income of $154 million or $4.42 per share and adjusted net income of $128 million or $3.69 per share in the first quarter, which are over $30 million better than last quarter and two to three times the results posted in the same period of the prior year. Spot tanker rates during the first quarter were near record highs for the first quarter, averaging approximately $61,000 per day across our midsized tanker fleet. With our significant spot exposure and a low free cash flow breakeven, we generated approximately $143 million in free cash flow from operations, which has increased our cash position to just shy of $1 billion with no debt as of quarter end. We continue to execute on our fleet renewal strategy, which includes acquiring modern vessels while selling our older vessels. I am pleased to announce that we have entered into agreements to acquire two Korean resale Suezmax newbuildings for a total of $190 million which are expected to be delivered in 2027. We also sold one 2009-built Suezmax for $53.5 million, resulting in an expected gain on sale of $32.5 million that will be recorded in Q2 2026. In addition, we have completed the previously announced sales of two Suezmax tankers for total proceeds of $73 million and recorded gains on those sales of $22.7 million in the first quarter. So far this year, we have acquired or agreed to acquire five modern vessels for a total commitment of $332 million and have sold or agreed to sell four vessels for $211 million. We also took advantage of the strong spot market and opportunistically outchartered one Suezmax for $80,000 per day for 10 to 12 months. And this past week, we outchartered one Aframax vessel for $60,000 per day for 12 months. Looking ahead to the second quarter, we expect even better results with tanker rates reaching record levels. So far in the second quarter, we have secured spot rates of $142,000, $122,000, and $98,000 per day for VLCC, Suezmax, and Aframax/LR2 fleets, respectively, with approximately 71% of spot days booked for VLCCs and on average around 57% of spot days booked for Suezmax and Aframax/LR2s. Lastly, Teekay Tankers has declared its regular fixed quarterly dividend of $0.25 per share. In addition, we declared a special dividend of $1.00 per share, which, like prior years, is based on the previous year's financial results. Moving to slide 4, we look at recent developments in the spot market. Spot tanker rates in Q1 were close to record highs for the first quarter, just behind rates seen in 2023. It is worth noting that spot rates were very firm even before the recent U.S.–Iran conflict. This was due to a combination of rising seaborne oil trade volumes, tightening of sanctions against Russia, Iran, and Venezuela, and the impact of fleet consolidation in the VLCC sector. In particular, the removal of operational exports from Venezuela by U.S. sanctions and the subsequent freeing up of Venezuelan crude oil exports to move on compliant tonnage to destinations such as the U.S. Gulf, Europe, and India benefited midsized crude tanker demand in Q1. Midsized spot tanker rates have continued to rise at the start of Q2, due to the impact of recent events in the Middle East, reaching record highs of over $120,000 per day during April. I will talk more about the reasons for these record high rates in the next few slides. Turning to slide 5, we are experiencing an unprecedented oil supply disruption with the effective closure of the Strait of Hormuz. On February 28, the United States and Israel launched a series of attacks against Iran targeting military and government sites. Iran subsequently responded by attacking a range of military and civilian assets across the Middle East region, including vessels transiting the Strait of Hormuz. Since then, the U.S. has also implemented measures aimed at preventing some ships from entering or leaving Iranian ports. The net result has been a significant drop in vessel traffic through the Strait of Hormuz, which in turn has led to a sharp decline in Middle East oil production and exports, while Saudi Arabia and the UAE have been able to divert some of their export volumes to ports outside of the Middle East Gulf, namely Yanbu in the Red Sea and Fujairah in the Gulf of Oman. Total crude oil exports from the region have fallen approximately 10 million barrels per day compared to prewar levels. Partially offsetting the supply loss has been a corresponding increase in crude oil exports from the Atlantic Basin and the West Coast of the Americas, where exports have increased by approximately 4.5 million barrels per day since the start of the conflict. This has been most evident in the U.S. Gulf, where crude oil exports reached a record high of 5 million barrels per day in April 2026, boosted by the release of oil from the U.S. Strategic Petroleum Reserve. While an increase in supply from the Atlantic is nowhere near enough to offset the loss of exports from the Middle East Gulf, the resultant increase in voyage distances and associated trading inefficiencies have combined to boost spot tanker rates as detailed on the next slide. Turning to slide 6, we review the trade inefficiencies which have supported tanker rates. First, a number of vessels are trapped and unable to exit the Middle East Gulf via the Strait of Hormuz, which has reduced effective fleet supply. At the time of writing, we count a total of 100 tankers of Aframax size or larger which are trapped west of Hormuz, of which 59 are VLCCs accounting for around 8% of the non-sanctioned fleet. In addition, there are a further 86 vessels of Aframax size or larger which are currently empty and sitting idle just outside the Strait of Hormuz or off the west coast of India in anticipation of a potential reopening, of which over 50 are VLCCs. Secondly, the rush to find replacement barrels, particularly by Asian refiners which have been most impacted by the loss of Middle East oil, has led to an increase in vessels ballasting long haul from the Pacific Basin to the Atlantic in order to secure cargoes. A large proportion of these vessels are then sailing back to Asia once loaded in order to meet Asian refinery demand. Finally, the increase in vessels loading in the Atlantic and sailing long haul to Asia has not been limited to the VLCC sector. We have also seen a significant lengthening in laden voyage distances for Aframaxes and Suezmaxes. As shown by the chart, average Aframax voyage distances for vessels loading in the U.S. Gulf have increased by 30% year on year while a record 69 Suezmaxes loaded from the U.S. Gulf during April, many of which are fixed for Asian destinations. We have even seen five Suezmax cargoes load from the U.S. Gulf and transit to Asia via the Panama Canal, which is a very unusual trade and highlights the lengths to which refiners in Asia are willing to go in order to make up for the shortfall in Middle East oil supply. Turning to slide 7, we look at the medium-term tanker supply and demand outlook. Given the ongoing conflict in the Middle East and the high degree of unpredictability regarding when and how the conflict may be resolved, it is very difficult to assess what will happen to tanker tonne-mile demand should the Strait of Hormuz reopen, as it will depend on how quickly vessel transits resume and the pace at which Middle East oil producers can resume exports. What we do know is that global oil inventories are being depleted across both commercial and strategic stockpiles. This could create additional tanker demand once the conflict is resolved as these inventories will have to be replenished. In addition, a push for energy security could lead to some countries building or expanding their strategic reserves in order to safeguard against any future disruption. Some countries may also look to diversify their sources of crude oil imports, which could lead to longer voyage distances and, therefore, higher tonne-mile demand in the medium term. On the fleet supply side, the tanker order book continues to expand due to the relatively high pace of new vessel ordering in recent months. However, a lack of scrapping means that the tanker fleet is rapidly aging, with the average age of the global tanker fleet currently the highest in over 30 years. As such, the tanker order book is largely offset by the number of compliant tankers reaching age 20 over the same time frame in which the order book will deliver, not to mention the large dark fleet of tankers, which already has an average age of well over 20 years. In short, while the tanker order book appears large on the surface, these vessels are needed to replace the older fleet of tankers which are approaching the end of their trading lives in the coming years, though the timing of when vessels will exit the fleet is uncertain. Turning to slide 8, we highlight our capability to create long-term shareholder value. This includes: first, our ability to generate significant free cash flow with a low free cash flow breakeven. In the last four quarters, we have generated $380 million or $11.14 per share in free cash flow, or nearly a 30% free cash flow yield based on the closing share price at the end of Q1 2025. With our new outcharters and no debt, our current free cash flow breakeven has decreased to approximately $8.2 thousand per day for the next 12 months, which allows us to generate significant cash flows in almost any tanker market. To emphasize the impact, every $5,000 per day increase in spot tanker rates above our low free cash flow breakeven is expected to produce about $53 million or $1.53 per share of annual free cash flow. Second, we are progressing our fleet renewal by selling older assets in today's high asset price environment and recycling that capital to acquire more modern vessels in a disciplined manner. This recalibration reduces our average age while maintaining operating leverage to the strong spot market. Looking back 12 months, we have sold or agreed to sell 11 vessels for $432 million with combined gains of $139 million and acquired or agreed to acquire eight vessels for $490 million. Going forward, we expect to maintain our earnings capacity through this approach of trading in older assets for more modern vessels. Third, we have significant investment capacity, which allows us to incrementally progress our fleet renewal requirements while being patient for larger transactions in the future at more attractive entry points. The tanker shipping industry is capital intensive and cyclical, and we believe having significant investment capacity allows us to act quickly when the timing is right. As we look ahead, Teekay has significant operating leverage in this strong market environment and a strong financial footing, which positions the company well to continue renewing our fleet, earning cash flow, building intrinsic value, and returning capital to shareholders. With that, operator, we are now available to take questions.

Thank you. We will take our first question from Jon Chappell with Evercore ISI. Please go ahead.

Thank you. Good morning. Let's start with that last part. It is something that we have spoken about in several calls, but now that the market's taken this next level higher — spot, time charter, and asset values — it seems like the investment decision becomes even more complex because there are so many geopolitical factors involved. You bought those two Suezmax newbuildings, but does it feel in this period of uncertainty and maybe elevated everything, that you just need to wait a little bit longer before some of the significant investment capacity is implemented?

Yeah, Jon. Good morning. I think you hit the nail on the head here. I think that is what every operator and every owner is looking at at the moment. As we finished last year, we were probably of the mindset that we could enter into a softer or more flat year this year, and then we had some new events that have certainly, as we have seen, brought us to record rates in Q1 and into Q2 here. That has had an impact, as always, on where asset prices are trading. The effect we have seen is that we have seen very high secondhand values for prompt delivery. We are trying to capture that. So it is always this balancing of how much is in the price of secondhand assets. We sold one of our oldest vessels and captured a record rate on that, and then we saw an opportunity to redeploy into what we think is a fairly near-term good opportunity of a quality asset that we are happy to own for the next 20 years in our fleet. So I think it is a little bit of that blocking and tackling at a higher watermark than we expected we would probably have seen. But I would say it is not a higher watermark in terms of our position at Teekay. We knew we had to get on with our fleet renewal, and that is what we are starting to do. As I said in my prepared remarks, we are probably going slower on the buying side than we would have hoped to do.

Just my follow-up, I am trying to understand the operational impact of the trade inefficiencies. Although I do not think anybody would be upset with $98,000 a day quarter-to-date for Aframaxes, when you look at your slide 4 and see that parabolic move higher in midsize tanker rates, it feels like maybe Aframax should be higher based on some of the headline rates that we have seen in that particular asset class. So is that a function of timing, or maybe some of the quarter-to-date was booked before rates took that next step higher? Is there a lot of excess ballast? Any situations or issues? Any reason why maybe the absorption of the headline rates is not as high for that particular asset class given some of the inefficiencies that you have spoken to?

No. As we know, it is always timing. I think the way we report these numbers is we look at the positioning as it is back to the next cargo again. I do not think we are overpromising on the rates that we are doing, but I think they are reflective of the market that we have seen. We are globally positioned and feel we have captured our fair share of the fixtures that have been out there when you operate on average. But I do agree that there is a huge variation in the rates that you are seeing in different regions. Some of it is timing; over a short period, rates can move a lot. Overall, I think we have actually secured our fair share of all the very strong fixtures. There is a big range when the market is this volatile — you are dealing with large variations in rates day to day and across different areas.

We move next to the line of Omar Nokta with Clarkson Securities.

Good morning. I just have a couple of questions and maybe the first one. Following up on Jon's question and your response in terms of fleet rejuvenation, given just how expensive things are and the uncertainty the market has, is the plan still to pair up acquisitions with sales as you have done over the past several quarters? It sounds like you are definitely not outpacing that in terms of making more acquisitions than sales. Just want to get a sense: is it still a plan to pair them up? Or would you be more of a net seller as you had been in prior years?

I would say there is not a plan to be a net seller. We are balancing a number of objectives. First of all, we are very keen on preserving scale, relevance, and earnings capacity. We think the level we are at now is probably close to the very minimum of exposure we want to have. It still gives us a lot of very meaningful upside given that over 80% of the fleet is in the spot market. So we like having that level of exposure given the size of the balance sheet. No appetite to reduce that. Of course, in a market that is running as hard as it is right now, it is very hard to find sensibly priced secondhand values for long-term holders and operators like ourselves. That is why we went in and took these, which are newbuildings, but one year out. The market is very dynamic, and I am sure when we speak a year from now there will have been a number of opportunities, and we will be looking at some very different fundamentals and opportunities. We will continue to do what we have been doing over the past three years: be opportunistic and do the best deals we can as we see them. At the moment, we are balancing continuing to create shareholder value, capturing as much of the strong market as we can, and, of course, keeping our eye on positioning the company for the long term and making sure that we set the company up in a way where we continue to create long-term shareholder value.

Thank you. That is certainly helpful. And then maybe just one simple follow-up in terms of fleet deployment here in the second quarter: in terms of the VLCC that is going to be sold and/or delivered to the buyers in June, how many operating days do you expect to have during the second quarter before it is sold? And in terms of the guidance you have given, for the remaining, say, 29% of the period where she is not fixed, are those regular operating days or will they be non-earning days related to delivery to the buyers?

Yeah. Hey, Omar.

This is Brody. In the second quarter, we expect to have 75 operating days for the VLCC. The remaining days will be unavailable days related to delivery. We expect to have delivered the ship by that time; that is the expectation.

Okay. Thank you. And so the 71% that you referenced, that is 75 days, sorry?

Yes. The 71% was based on a 90-day period. It is actually more like 88% of the 75 days that has been fixed at that rate level.

Got it. Understood. Okay. Thanks, Brody, and thanks, Kenneth. I will pass it back.

Thank you. Our next question comes from the line of Ken Hoexter with Bank of America. Please go ahead.

Hey, great. Good morning, Kenneth and team. Just some commentary on inventories, not just the rebuild but maybe some newer areas. Have you put pen to paper on how meaningful or how long that could go out? Would you expect that the rebuild cycle might not start immediately once we see a reopening, that traders might allow pricing to come back to normal and so the rebuild could be a long tail rather than an immediate move? Maybe just thoughts on that inventory side.

Thanks for that question. I will have Christian give a bit more color on this.

Yeah. I think our view here is that once the Strait reopens, there will definitely be a need to replenish inventories. The pace at which that is done will be dependent on market conditions. If oil prices are still over $100 a barrel, it may not be an immediate urgency to refill inventories. But as and when Middle East production gets back to normal and we return to a more normal situation with lower oil prices, I think there will be a need that will probably kick-start the restocking process. I also think some countries that do not have strategic reserves will look at building them in terms of energy security, and there may be a need to build strategic reserves over and above pre-crisis levels. Some countries, especially in Asia, may conclude they have been over-relying on the Middle East Gulf for their oil imports and will look to diversify. That fear of a repeat event is likely to persist. So you will likely see more diversification of trade as well, which from a tanker market perspective could lead to longer voyage distances. Overall, I think there will be a tailwind from this in terms of a boost to tanker demand. The pace at which this happens will depend on market conditions and oil prices; it might be more of a longer-term rebuild rather than a sudden rebuild once the Strait reopens.

Do you not think trading patterns go back to normal and cut the length of haul over time? Do you think this structurally changes trading patterns?

It might. That remains to be seen, but I think it is similar to what happened with Russia: even if the situation eventually normalizes, countries may be reluctant to return to the same level of reliance on a single supplier. Energy security concerns will be a big driving force once this resolves itself. In the short term, Asian countries will likely still take a lot of oil from the Middle East Gulf because it is the shortest distance, but over a longer time period, countries are looking at these choke points and ways to mitigate that risk, which could lead to changed trading patterns.

Great. Thanks for that. And then just thoughts on the dividend: you declared the special dividend. Thoughts on possibly increased frequency of dividends if the market is not accommodative to buying? Maybe your thoughts on capital allocation in the near term — how large do you want that cash hoard to start building?

We have been pretty consistent over the past three years in terms of how we deal with the dividend. The interesting question is when do we have enough cash? As I said in my prepared remarks, this industry is capital intensive, and opportunities can come suddenly. Of course, you can do a lot more with a billion dollars than you can with half a billion dollars. We can see our cash position grow quite meaningfully over the next quarter as well, which gives us a lot of capacity. But it is a discussion we will have again next year in terms of any other sweeps we may want to do on that cash. Meanwhile, the market is so dynamic that we all feel very good about the strong position we are in and the incredibly strong balance sheet we have managed to build over the past four years.

Great. Thanks a lot for the thoughts and time. Appreciate it.

Thank you. At this time, there are no further questions. I would like to turn the floor back to the company for any additional or closing remarks.

Thank you very much for listening in today. We look forward to reporting back to you in the next quarter later in the year. Have a great day.

This concludes today's conference. We thank you for your participation. You may disconnect at this time.