Teekay Tankers Ltd.

Please stand by. Welcome to TK Tankers Ltd.'s fourth quarter and fiscal 2018 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 the star followed by 1 to register for a question. For assistance during the call, please press star 0 on your touchstone phone. As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin McKay, TK Tankers Ltd.'s Chief Executive Officer. Please go ahead, sir.

Before Kevin begins, I'd like to direct all participants to our website at www.tktankers.com, where you will find a copy of the fourth 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 fourth quarter 2018 earnings release and earnings presentation available on our website. I'll now turn the call over to Kevin to begin.

Thank you, Lee. Hello everyone and thank you very much for joining us today for TK Tankers fourth quarter 2018 earnings conference call. With me here in Vancouver, I have Stuart Andrade, TK Tankers Chief Financial Officer, and Christian Waldegrave, Director of Research, TK Tankers. Beginning with our recent highlights on slide three of the presentation, TK Tankers generated total cash flow from vessel operations of $62 million during the fourth quarter. We reported adjusted net income of $14 million or $0.05 per share in the fourth quarter compared to an adjusted net loss of $18 million or $0.07 per share in the prior quarter. CritTankers spot rates improved significantly during the fourth quarter, spurred by both winter market seasonality and positive underlying supply and demand fundamentals. Although rates have since declined from the highs reached at the end of 2018, our crude spot tanker rates booked in the first quarter of 2019 to date are higher than the fourth quarter of 2018. I will touch on the market in more detail later in the presentation. While the tanker market has seen increased volatility and stronger rates, we continue to focus on strengthening our financial position. In the fourth quarter, we completed the previously announced sale-leaseback transaction relating to four vessels and a loan to finance working capital in the company's RSA pool management operations. These financings are expected to provide approximately $40 million of additional liquidity. Having completed these initiatives, we drew on our working capital facility for the first time in February, and our liquidity is now approximately $115 million. In addition, we recently signed a term sheet for an additional sell-leaseback transaction of two vessels, which upon expected completion in the first quarter of 2019, is expected to increase liquidity by approximately $25 million and extend our debt maturity profile. Lastly, we continue to position TK Tankers to best capture value and maximize cash flow from an improving spot tanker market. Recently, we have increased our in-charter exposure by 2.5 Afromax vessel equivalents for periods ranging from one to two years with options to extend. At the same time, we secured short-term Suezmax fixed revenue cover for the first half of 2019 at a very attractive rate as we protect against some near-term weakness during this period, which I will discuss over the next few slides. Turning to slide four, we look at recent developments in the tanker spot market. Having been at cyclical lows for much of the year, tanker spot rates improved significantly during the fourth quarter of 2018 to reach the highest levels seen in three years. This increase can partly be explained by the return of normal fourth quarter seasonality, though it is also a reflection of improved tanker market fundamentals that started to make an impact in the middle of 2018 onwards. The fourth quarter saw OPEC crude oil production increased and many others. In addition to this, there was a significant increase in tanker demand in the U.S. Gulf. These positive demand developments were set against the backdrop of very low fleet growth in 2018, with high scrapping activity keeping fleet growth to just 1% for the year. The combination of additional cargo supply at a time of low fleet growth was the catalyst for a strong recovery towards the end of 2018. Looking at the charts on the slide, you can see that rates have come off from their fourth quarter highs at the start of 2019. However, rates are still higher year on year and are largely tracking the five-year average. We're therefore entering 2019 on a much more positive note than we did last year. Turning to slide five, we look at the impact of recent OPEC supply cuts, which will be a near-term headwind for tankers in the first half of 2019. As shown by the top chart on the slide, OPEC has moved aggressively to cut production in the early part of this year, with a 1.6 million barrel per day reduction in output since November 2018. In fact, OPEC production is now below the production target agreed at the Vienna meeting last December. This is due to steep cuts from Saudi Arabia, coupled with unplanned outages in Libya and production uncertainty in Venezuela and Iran. Venezuelan crude oil production could decline further in the coming months due to the effects of US sanctions, though its impact on tanker demand may be offset by longer voyage distances as Venezuela looks to sell these displaced barrels into other markets such as Asia. This steep decline in OPEC production, which comes at a time when refineries are heading into seasonal maintenance, creates a headwind for tanker demand in the near term. However, it is important to recognize The situation is very different to the beginning of 2017 when OPEC last cut supply. Prior to the 2017 cut, global oil inventories stood at more than 300 million barrels above the five-year average, and OPEC needs to implement a steep and sustained cut to bring surplus inventories down and give support to oil prices. Today, global oil inventories are much more balanced and are currently below five-year average levels when measured in both total barrels and in days of forward cover. Looking ahead, we expect that a pickup in oil demand coupled with an influx of new refining capacity coming online this year and the need to build fuel inventories ahead of IMO 2020 will require OPEC to reintroduce barrels into the market during the second half of the year, leading to a more positive outlook for tanker demand compared to the first half. On slide 6, we look at U.S. crude oil production and exports. U.S. crude oil production has undergone a radical transformation over the past decade due to the development of shale oil, with production rising from a low of 5 million barrels per day in 2008 to a record high 11 million barrels per day last year, with the IEA forecasting production to reach 13.2 million barrels per day by 2020. Following the repeal of the U.S. crude oil export ban at the beginning of 2016, This excess production has driven export growth at a similar pace. By the end of last year, U.S. crude oil exports were averaging 2.5 million barrels per day. Approximately 50% of these exports currently head to Asia and 25% to Europe, which has been very beneficial for tanker demand and is one of the key reasons that spot tanker rates recovered in the second half of last year. While infrastructure constraints are currently limiting continued growth in exports, we estimate that by the end of this year, debottle decking projects should allow a return to growth and the potential for exports to reach as high as 4 million barrels per day. For TK Tankers, this will be a positive development on two fronts. First, the growth in exports to Europe will benefit the Afromax and, to a lesser extent, the Suezmax sectors. Secondly, the growth in exports to Asia on VLCCs will benefit our U.S. Gulf Afromax Lightering business. Turning to slide seven, we look at our tanker fleet utilization forecast out to 2020 based on our view of tanker supply and demand fundamentals. We expect the tanker fleet to grow by approximately 3.5% in 2019. This is an increase from the 1% fleet growth seen last year, but it's still below long-term average fleet growth levels of around 4% to 5%. Most of the fleet growth is concentrated in the first half of the year and is weighted towards the VLCC segment. However, we expect this growth to be partly offset by increased off-hire time as a number of vessels will go out of service for the installation of scrubbers during the course of the year. In 2020, we are confident fleet growth will fall below 2% again as the order book is somewhat set with shipyards largely full to the first half of 2021. As mentioned earlier in the presentation, we anticipate some headwinds in the first half of this year from OPEC supply cuts, seasonal refinery maintenance, and continued new building deliveries. However, we believe tanker demand should increase significantly starting mid-year, driven by an increase in U.S. crude oil exports, the return of OPEC barrels to the market, an increase in global refining capacity, and the positive impacts of the IMO 2020 regulation. Tanker fleet utilization is anticipated to rebound significantly from the low to mid 80 percentile range up to the upper 80s or 90 percentile level as we move through this year and into 2020, which should translate into increased volatility, which historically has driven tanker rates higher. Turning to slide eight, as mentioned in my opening remarks, although rates have declined from the highs reached at the end of 2018. Accrued spot tanker rates in the first quarter of 2019 to date are higher than the fourth quarter of 2018. Based on approximately 70% and 68% spot revenue days booked, TK Tankers' fourth quarter to date Suezmax and Afromax bookings have averaged approximately $26,000 and $28,500 per day respectively. For our LR2 segment, with approximately 51% of spot revenue days booked, first quarter to date bookings have averaged approximately $24,500 per day. With that operator, we are now available to take questions.