Teekay Tankers Ltd

NYSE:TNK

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to the Teekay Tankers Ltd.'s Second Quarter 2018 Earnings Results Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Now for opening remarks and introductions, I'd like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Ltd.'s Chief Executive Officer. Please go ahead, sir.

[Unidentified Company Representative]

Before Kevin begins, I'd like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the second quarter 2018 earnings presentation. Kevin 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 2018 earnings release and earnings presentation available on our website.

I will now turn the call over to Kevin to begin.

[Kevin Mackay, President & CEO]

Thank you, Lee. Hello everyone, and thank you very much for joining us today for Teekay Tankers Second Quarter 2018 Earnings Conference Call. With me here in Vancouver, I have Stewart Andrade, Teekay Tankers Chief Financial Officer; and Christian Waldegrave, Director of Research at Teekay Tankers.

Beginning with our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total cash flow from vessel operations of $16.6 million during the quarter compared to $22.3 million in the previous quarter. We reported an adjusted net loss of $28.7 million or $0.11 per share in the second quarter compared to adjusted net loss of $22 million or $0.08 per share in the previous quarter.

Crude tanker spot rates decreased in the second quarter as OPEC supply cuts, a further drawdown of global inventories and an oversupply of tonnage continued to weigh on the market, which I will touch on in more detail later in the presentation. In June and July, we signed term sheets for two new financings, which, including our sale leaseback transaction previously announced, are expected to increase our net liquidity position by approximately $110 million once they are completed. Finally, last week, we secured a 12-month time charter-out contract, with an extension option for one of our Suezmax tankers with a key customer. The time charter rate is well above current spot market rates and is expected to provide total fixed rate revenues, $6.4 million over the initial 12-month period.

Turning to Slide 4. Since reporting earnings last quarter, we have continued to pursue various initiatives to improve our liquidity position during this period of weak tanker rates. Upon completion, our current financing initiatives will bolster our liquidity position by approximately $110 million, while also extending our debt maturity profile. In June 2018, we signed a term sheet for a sale leaseback financing transaction relating to six Aframax tankers, which is in addition to the term sheet that we signed for a sale leaseback transaction for seven midsized tankers that we previously announced. Both of these transactions are expected to increase our liquidity position, extend our debt maturity profile and include attractive purchase options for all 13 vessels. Please see the appendix to this presentation for our updated pro forma debt maturity profile to reflect these transactions.

In July 2018, we signed a term sheet for a loan to finance working capital in our RSA pool management operations, which is also expected to increase our liquidity position. All of these financings are currently in a documentation stage and remain subject to customary closing conditions precedent and the execution of definitive documentation.

We are targeting to complete them in the third quarter of 2018. On a pro forma basis for the [Technical Difficulty] financings, our total liquidity position would be approximately $190 million as of June 30, 2018. We'll continue to monitor our liquidity position. Tanker market remained under pressure. We do have additional options available to us, which further add to our liquidity position, including more sale leasebacks and select asset sales.

Turning to Slide 5, we look at recent developments in the spot tanker market. OPEC supply cuts continue to weigh on crude tanker rates during the second quarter of 2018. OPEC crude oil production fell to 31.6 million barrels per day in April, the lowest level in over three years. Decline in OPEC supply was due to both high compliance with these production cuts and plummeting output from Venezuela, where supply is at the lowest level since the early 1950s.

The second quarter also saw further decline in global oil inventories with stockpiles in the OECD falling below the five year average for the first time since 2014. This shows the global oil supply continues to lack demand with oil being removed from inventories in order to meet the shortfall.

This has acted as a drag on tanker demand over the past 18 months as removing oil from inventories effectively replaces import demand. However, in recent weeks, we have seen the return of some volatility to midsize tanker rates as shown by the chart on the right. This is particularly evident in the Atlantic Basin, with Aframax rates in Mediterranean and U.K. continent exceeding $20,000 per day at times.

We believe that increasing oil production from Russia and Saudi Arabia, coupled with rising exports from the U.S. are driving this volatility, which is encouraging as the third quarter is usually the weakest period of the year for tanker rates.

Turning to Slide 6, we look at tanker market fundamentals, which continue to indicate positive inflection point later in 2018. Global oil demand continues to grow at a robust pace, with the market forecasting agencies projecting 1.6 million barrels per day growth in 2018 and a further 1.5 million barrels per day growth next year.

As mentioned on the previous slide, high oil demand growth and OPEC supply cuts have led to a drawdown in global oil inventories below the five year average and supported oil prices above $70 per barrel. This has led to a response from OPEC who have pledged to increase oil production by up to 1 million barrels per day to keep markets well supplied.

We are already seeing this extra oil on the markets, with Saudi Arabia and Russia reportedly adding 0.5 million barrels per day of production between them in June.

U.S. crude oil exports continue to hit new highs, averaging more than 2 million barrels per day in recent months and reaching as high as 3 million barrels per day in some weeks. Approximately 1/3 of U.S. exports are flowing long haul to Asia, with China being the second largest buyer of U.S. crude this year after Canada. These flows may be threatened by the recent U.S. China trade dispute, though this could result in more U.S. crude flow into Europe directly on Aframaxes and Suezmaxes, which would add to midsize tanker demand in the Atlantic Basin.

Finally, we see the new IMO regulations on sulfur content in bunker fuels, due to enter into force in January of 2020 as another positive development for the tanker market. Some of the positive impacts of the new regulation include increasing refinery throughput in order to meet demand for low sulfur fuels, which should give a boost to crude tanker trade. Growth in clean tanker trade due to the need to deliver these low sulfur fuels to global bunker markets. Finally, an increase in floating storage, particularly for excess high sulfur fuel oil, which will have a reduced outlet market post 2020. You could also see the emergence of a new contango play over the next 18 months, which could further stimulate floating storage demand and tighten available fleet supply.

Turning to supply. The first half of the year has seen 15 million deadweight tonnes of tankers removed from the global fleet, putting 2018 on track for a record tanker scrapping year. In the midsize section segments, 41 vessels have been scrapped year-to-date versus 53 deliveries, equating to net growth of approximately 0.8% through the first half of the year. Encouragingly, only 19 midsized tanker orders have been placed so far this year. And with newbuilding prices rising, we are hopeful that ordering will remain low.

Looking ahead, we forecast that the midsize tanker fleet will grow at a rate of just 2% per annum this year and the next. In sum, we continue to be encouraged by developments in the midsized tanker supply and demand fundamentals and believe that an inflection point will be reached later this year.

In addition, we believe that the new IMO regulations will be a positive development for the tanker market as we move towards 2020.

Turning to Slide 7. As I touched on earlier, we have seen greater rate volatility in what is normally the weakest part - the weakest quarter of the year. This is reflected already in higher spot tanker rates for the third quarter of 2018 to date compared to the second quarter. Based on approximately 39% and 37% of spot revenue days booked, Teekay Tankers' third quarter to date Suezmax and Aframax bookings have averaged approximately $14,200 and $14,000 per day, respectively.

For our LR2 segment, with approximately 31% spot revenue days booked, third quarter to date bookings have averaged approximately $10,700 per day.

With that, operator, we are now available to take questions.

[Operator]

[Operator Instructions]. And we'll take our first question from Jon Chappell with Evercore.

[Jonathan Chappell, Evercore ISI]

First question or two on the new sale leasebacks that you just announced. So $190 million certainly seems like a pretty long runway for a company of your size, but obviously, you're not the first to do these and you probably won't be the last. So just curious, so there's 13 ships, $190 million of total pro forma liquidity, is that a good place for you right now as you see ahead on the current market, or there are still other opportunities in the sale leaseback market that you're pursuing?

[Kevin Mackay, President & CEO]

Good question, Jon. It's something that we've been really pleased in terms of our progress that we've managed to make over the last couple of quarters to raise our liquidity level to that amount once we close these. Based on our projections to the market and where we think the volatility will come back, we are pretty confident that this should be enough to see us well through the rest of the headwinds that we'll probably face in the market and see us through to the other side. But we do have a plan if those don't work out, and we do in our projections look at worst-case scenarios. And as I mentioned in the highlights, we do have other options on further sale leasebacks or potential asset sales. So at this point in time, seeing the volatility start to come back into the market and raising the amount that we have, I think, we're feeling a lot more comfortable than what we were at the start of the year.

[Jonathan Chappell, Evercore ISI]

Okay. And then I don't think we had full disclosure on the first sale leaseback and I think they're both closing I guess within the next eight weeks or so. Where the terms of this similar to the terms of the first sale leaseback [Technical Difficulty]? And then where the counterparties similar as well?

[Stewart Andrade, CFO]

Jon, it's Stewart here. Actually - it's a different counterparty. So it isn't the same counterparty. We're in documentation on both as Kevin mentioned. And the terms are actually quite different between the two sale leasebacks, both the advanced ratio and the borrowing cost. But in aggregate, as Kevin said, it's between the two sale leasebacks. It's $90 million of liquidity that it will add and the average bareboat across the two is about 8200.

[Jonathan Chappell, Evercore ISI]

Okay. 8200. And then does that - as we get it back into the implied fixed associated with that or is that something you could provide?

[Stewart Andrade, CFO]

I'm sorry, you cut out. I didn't quite hear you.

[Jonathan Chappell, Evercore ISI]

Can we kind of back into the implied fixed associated with 8200 or is that something that you can provide for the - each of the transactions?

[Stewart Andrade, CFO]

I'm sorry. I didn't actually - We're having a problem with the line. And I didn't catch. Are you asking for the borrowing cost? Is that what you are asking?

[Jonathan Chappell, Evercore ISI]

Exactly, yes.

[Stewart Andrade, CFO]

The borrowing cost is - it ranges on them between in the sort of low to mid-6s up to the sort of mid-8s.

[Jonathan Chappell, Evercore ISI]

Okay. We'll wait for the final documentation. Really just quick, Kevin, you've talked a lot about the volatility, but obviously, the [Technical Difficulty] is of the utmost importance. So I wouldn't think it would be fair acquiring ships at the bottom of the market, but do you think you'd be more aggressive in the [Technical Difficulty] market given the kind of near-term optimism you have?

[Kevin Mackay, President & CEO]

Again, apologies. The line is breaking up. So if I don't get this answer tied to your question properly, Jon, go ahead and ask it again. But no I think we're - we've got a fleet of close to 60 tankers in a space that I think is going to be pretty exciting as we get close to this 2020. So I think, we have enough exposure to the market when things start to turn and improve, it should really start to impact our bottom line well. So at this point, taking on additional risk by adding tonnage is not something that I feel that we need to do, but it's certainly something that we look at ongoing. And if there's an opportunity there where we see some low-hanging fruit, and we can position a vessel into a market or a region that we think is going to have increased volatility, it's definitely something that we will continue to look at. So I wouldn't rule it out, but it's, again, it's not something that I think we need to go out and take on far more additional risk until we actually see the volatility on a consistent basis month after month.

[Operator]

And next, we'll move to Noah Parquette with JPMorgan.

[Noah Parquette, JPMorgan Chase & Co.]

I wanted to get your guys [Technical Difficulty] the rate of ordering and relatively high, more on the VLCCs but kind of slowed down lately. Can you talk a little bit about why do you think that's happened? And are you concerned at all about the new supply coming up?

[Kevin Mackay, President & CEO]

Okay. Thanks, Noah. Yes, it's a good question. I think it's something that will grab the headlines with some speculative ordering on the VLCC side, in advance of the IMO regulations kicking in. I'm more focused on the midsized space. And I think the ordering, as I mentioned, we've only had I think it was 19 orders reported this year across the whole midsize segment, which is really positive. And I think with newbuilding prices continuing to inch up, we're hoping that, that will be the tyrant to people coming in and speculating the midsized space. But overall, I think the fleet growth numbers across the whole tanker space, although there has been ordering, it still remains below the average five-year - or sorry, 5% growth rate that we've particularly seen historically. So at this point in time, I'm keeping an eye on it, but I'm not totally concerned.

[Noah Parquette, JPMorgan Chase & Co.]

Okay. And then just following up on the details around. Did I hear that right? You said $90 million, two sale leasebacks and I guess, will that imply the working capital [Technical Difficulty] on?

[Kevin Mackay, President & CEO]

Yes, that's correct.

[Operator]

And next from Merrill Lynch, we'll go to Ken Hoexter.

[Kenneth Hoexter, Bank of America Merrill Lynch]

It's Ken Hoexter. I just wanted to follow-up. You were shopping in and out just like you said some of the questions were before and just were before. So I just want to understand your thoughts on tanker. Are you suggesting that trough is behind just given what you're talking about on capacity? Or are you planning a fuller on rates? Or are you seeing them continue to struggle?

[Kevin Mackay, President & CEO]

Well, we have to be honest. The rates aren't fantastic, but where we are encouraged is that we're sitting here in August, and we're looking at markets such as the U.S. Gulf starting to pick up the mid - in the mid- to high teens and relatively supported. There's increased volatility in Asia. So generally, for a typical third quarter, we're encouraged by the fact that the market is able to move up and down in various markets, which to us, speaks to a tightening of the supply-demand balance in various areas, which tends to pretend to the fundamentals starting to swing in our favor. Do I think that we're there yet do I think that month on month, things are going to improve? We can't say that. It's a volatile market. But I think comparing the last couple of months with what we've seen over the last 6, 7, 8 months. We're encouraged by some of the volatility we're seeing.

[Kenneth Hoexter, Bank of America Merrill Lynch]

And just on - I know you've got - to Jon's questions before, kind of very concerned about the capital and the runway there, but how do you think about in terms of affecting your [Technical Difficulty] how do you plan to comply with ballast regulations?

[Kevin Mackay, President & CEO]

You broke up there. So again, apologies if I don't get the answer correctly directed to your question. But we, in our forecasting methodology, do look at where we think our exposure is in terms of having to put ballast water treatment systems on ships and that is built into our forecast models. But at this point in time, with the liquidity initiatives that we've got in place, we feel more than comfortable that we can handle whatever implementations of that equipment that we might have to put in 2019 or 2020.

[Kenneth Hoexter, Bank of America Merrill Lynch]

And same for IMO 2020?

[Kevin Mackay, President & CEO]

For IMO 2020, there is actually no capital cost component if you don't install scrubbers. And at this point in time, Teekay Tankers doesn't have plans to put scrubbers on our tonnage. So from a CapEx requirement, it's not something that we've had to build in.

[Kenneth Hoexter, Bank of America Merrill Lynch]

Okay. And then I might have missed your answer to part of Noah's question if I could just follow-up on that. Then your concern on the - I think he was asking about rate of order flowed, but I guess, there is - is there not a slight uptick in delivered in 2019 versus 2017. Are you concerned more vessel capacity coming online?

[Kevin Mackay, President & CEO]

No. Probably Christian, you can probably give some facts.

[Christian Waldegrave, Director, Research]

Yes, I think, as you've touched on that growth is coming next year is really concentrated in the VLCC segment. So in the rest of the tanker fleet, we're probably looking at less than 2% growth in 2019. In the V that you've touched on because of the ordering, it is a bit higher. It's probably going to be in the region of 4% to 5% growth on the Vs next year. But when you net it all out, we're looking at fleet growth - total tanker fleet growth next year of about 3% to 4%, which is obviously up a little bit from this year, but it is below average level. If you look at the last decade, the tanker fleet grew by an average of 4% to 5%, so it's still not happening at normal levels of fleet rate.

[Kenneth Hoexter, Bank of America Merrill Lynch]

I'm sorry. Christian, you stated out that net growth of what? Did you say 3% to 4%?

[Christian Waldegrave, Director, Research]

3% to 4% across the whole tanker fleet, which isn't abnormally high levels of fleet growth compared to what we've seen over the past decade. So even though the Vs are a bit higher I think that when you net it out with the lower growth in the midsize, we're not too worried about the fleet growth next year.

[Operator]

And next, we'll go to Amit Mehrotra with Deutsche Bank.

[Christopher Snyder, Deutsche Bank]

This is Chris Snyder on for Amit. First question is around the IMO 2020. I know you guys said, you think it's positive for tanker markets, and I think, everyone agrees it's positive on the product side. I think the outlook on the crude side is a little more - and there's clearly positives with new trade lanes, potential for storage demand and slow steam, or they're - you're also on the crude side losing the bunkering trade. If you could just provide any color on how you think all of that nets out, with a specific focus on the crude tanker fleet?

[Kevin Mackay, President & CEO]

Yes, it's a good question. It's something that there's a lot of question marks around how IMO and the implementation of the regulation is going to fundamentally change a lot of different aspects of oil flows. I think Christian probably confirmed this, but I've seen projections where the increase in crude demand is roughly 1.5 million barrels a day of additional crude that will need to flow in order for refineries to generate enough low sulfur fuel to supply the market. So I think, there will be incremental demand on crude just to meet fuel supply requirements. But I think, the more interesting aspect is what we're going to see is the change in trade patterns. And interestingly enough, we're starting to see that already. Just last week, we had a customer inquire about providing a contract of our freight men on our Aframax business to move low sulfur crude into a refinery, which traditionally has used heavy [sailor]. So I think, the refiners are already starting to look at their crude slates. And as a result, we're going to start seeing more and more of these questions and experiments on moving different grades of crudes from different regions than what we've historically seen. And typically, when you get dislocations like that you get inefficiencies in the system, which eats into supply of tonnage and increases tanker demand. So although I would agree with you that the - on a per barrel basis, where it looks to today, it looks like the clean trade will benefit in terms of greater volume, I think, the interesting piece of the crude space is in the change in crude flows. And the inefficiency that, that's going to create.

[Christopher Snyder, Deutsche Bank]

That's very helpful. And the next is kind of around the contracting environment. I mean, with Suezmax and Aframax rates picking up here over the last few weeks, have you just - or seen any increase in flows from the charters looking to lock up tonnage maybe longer term or I think into some long-term time-charters?

[Kevin Mackay, President & CEO]

Yes. I think the oil companies and the traders are looking at the same fundamentals that we're looking at and are starting to come into the market certainly more so in the last two months than what we've seen in the last 12 to 18 months. The level of inquiries picked up. They're looking for cover certainly through the 2020 period. And one of the reasons that we were able to secure the time charter on the Suezmax, we did was because of the relationship we had with one of our key customers, where in the last, again, 6 to 18 months, we haven't seen that level of inquiry.

[Christopher Snyder, Deutsche Bank]

Following up on that. If you are seeing an increase for maybe two, three year charters, are those coming, you mean to the one-year rates that we're seeing being published?

[Kevin Mackay, President & CEO]

Well, other than the deal we've done, I haven't seen any specific figures on what other people have been able to conclude, but across the market indexes, certainly, we were very happy with what we were able to achieve above that level.

[Operator]

And next, we'll go to Magnus Fyhr with Seaport Global.

[Magnus Fyhr, Seaport Global Securities]

One question on the IMO 2020. You mentioned the transportation of clean products that are likely to increase significantly beyond 2020. Can you refresh my memory? How many of your nine LR2s are currently trading clean?

[Kevin Mackay, President & CEO]

At the moment, we have I think it's three.

[Magnus Fyhr, Seaport Global Securities]

Okay. And are there any thoughts about how long will it take to get those ready if you wanted to [Technical Difficulty] ship from dirty to clean and what would the expected cost be?

[Kevin Mackay, President & CEO]

That's a very difficult question to answer, Magnus, because there's a lot of moving variables when you come into trying to get the ships cleaned up. A lot depends on the availability of the right types of cargo in the region that your ship is in and where you position the ship to. Oftentimes, you have to carry sort of what we call light cargoes until you can get the next condensate to clean up. So it can vary from a couple of months to six months. It all depends on how active the clean market is and where you're positioning your ship into. And again, in terms of cost, it all comes down to what kind of grades you're putting on the ship and what kind of residual [indiscernible] and cleaning that leaves you having to do with chemicals and other agents. So it's - I can't guide you a fixed number of. There are a lot number of...

[Magnus Fyhr, Seaport Global Securities]

Yes. Is it too early or do you have internal discussions whether you [Technical Difficulty] position those vessels into clean trade ahead of [Technical Difficulty] or would you wait to see how the market develops?

[Kevin Mackay, President & CEO]

We have LR2s because of their fundibility between the crude and the clean trade. And at the moment, the signals that we're getting is that the volatility is returning quicker to the crude space than it is to the clean market. So for the time being, we're watching and waiting. We did transition over a couple of ships earlier this year, and we held off doing any more until we see stronger signals on the distillate side that we're able to get those ships cleaned up. So, for now, they're going to stay in the crude trade.

[Operator]

And next, we'll go to Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis, Morgan Stanley]

Only a modeling question. If you have given any guidance about the ballast water treatment cost, the CapEx that you have for the next few years?

[Stewart Andrade, CFO]

Fotis, so we're still working through exactly, which vessels will have to fit the ballast water treatment systems on in 2019. But I would say the - as a maximum, we're looking at about $20 million in 2019 and I think there's a good chance that we won't end up having to fit all of those and in 2020, about $20 million in 2020 as well.

[Operator]

And that concludes today's question-and-answer session. I like to turn the call back over to Kevin Mackay for any additional comments or closing remarks.

[Kevin Mackay, President & CEO]

Thank you very much for joining us today. And we look forward to speaking to you next quarter.

[Operator]

And that does conclude today's conference. We thank you for your participation. You may now disconnect.