Teekay Tankers Ltd.

Welcome to TK Tankers Ltd.'s first quarter 2019 earning 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 star 1 to register for a question. For assistance during the call, 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 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 our first quarter 2019 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. Thank you, Lee.

Hello everyone and thank you very much for joining us today for TK Tankers first quarter 2019 earnings conference call. With me here in Vancouver, I have Stuart Andrade, TK Tankers CFO and Christian Waldegrave, Director of Research at TK Tankers. Beginning with our recent highlights on slide three of the presentation, TK Tankers generated total adjusted EBITDA of $63.4 million during the first quarter. comparable to the $63 million in the previous quarter. We reported adjusted net income of $14.6 million or 5 cents per share in the first quarter in line with the previous quarter. These strong results were driven by moderately increased crude tanker spot rates during the first quarter of 2019. However, spot tanker rates have declined since the latter half of the quarter as the market has faced a number of seasonal and other short-term headwinds. We believe these headwinds are temporary in nature and expect a significant firming in the tanker market from the second half of 2019 and into 2020. I will cover our market outlook in more detail later in the presentation. In May, we completed the previously announced sell-leaseback transaction relating to two Suezmax tankers and also increased the amount available under the loan to finance the company's RSA pool management operations, which together increased liquidity by approximately $40 million. Having completed these financial initiatives, we have a strong liquidity position, which currently stands at approximately $160 million and have no plans for further financing initiatives to increase liquidity. Lastly, we continue to position TK Tankers to best capture value and maximized cash flow from the current and forward spot tanker markets. Recently, we chartered out a Suezmax vessel for six months at $27,500 a day to protect against near-term weakness in this vessel class. We also in-chartered an Afromax vessel for delivery later in the year to capture additional upside from what we believe will be a much stronger market later this year and next. The vessel was taken for a firm two-year period Thank you very much. Rates during the first quarter were supported by the same positive drivers that we saw in the fourth quarter of last year, namely high seasonal oil demand, the impact of winter weather delays, and relatively high global oil production prior to the full implementation of OPEC supply cuts. Spot rates have subsequently fallen during the second quarter, which is typical at this time of year due to seasonally lower demand. However, the market also faces some near-term challenges in the form of OPEC supply cuts, heavier than normal refinery maintenance as refiners prepare for IMO 2020, and relatively high fleet growth at the start of the year. This has led to a decline in rates during Q2, as shown by the chart on the right. Although our spot earnings to date are significantly higher year on year, which demonstrates that the market is fundamentally better balanced than it was 12 months ago. Furthermore, we believe that the headwinds that we are currently facing are temporary in nature and we anticipate that the market will firm significantly in the second half of this year. Turning to slide five, we look at positive developments in the demand side that will continue to drive a tanker market recovery in the coming months. Global oil demand remains relatively firm with a forecast of 1.3 million barrels per day growth in 2019 and 1.5 million barrels per day growth in 2020. This is in line with long-term averages and shows that demand for oil remains robust in spite of uncertainties in the global economy. More importantly for tanker demand, global refinery throughput is set to increase significantly in the coming months as shown by the chart on the top right of the slide. This is partly due to normal seasonality, but also reflects the fact that refiners will have to increase throughput in order to produce sufficient low sulfur fuel ahead of the new IMO regulations that come into force from January of next year. The new IMO regulations could also provide a boost to tanker demand in the form of new trading patterns for both crude and products, as well as floating storage demand. In total, the IEA forecasts a 4.6 million barrel per day increase in global refinery throughput between the seasonal low point in March and the seasonal peak in August. This should generate significant demand for both crude and products tankers in the coming months. Tanker demand should be further boosted by an increase in U.S. crude oil exports later in the year as new pipeline capacity comes online linking the Permian Basin to the U.S. Gulf Coast. is expected that the U.S. crude oil exports may reach 4 million barrels per day by the end of the year, rising towards 5 million barrels per day during 2020. This will generate additional mid-sized tanker demand for direct exports to Europe on both Suezmax and Afromax vessels, as well as Afromax lightening demand for exports to Asia on VLCCs. Lastly, we note that global oil markets remain finely balanced, with oil inventories hovering around the five-year average. We therefore expect that OPEC may start returning barrels to the market during the second half of the year in order to keep the market well supplied as demand rises, which will be a further positive for tanker demand. However, the political situations in Iran, Venezuela, and Libya remain wildcards and could create some volatility for rates during the remainder of the year. Turning to slide six, we take a look at tanker fleet fundamentals. Tanker fleet growth is expected to slow considerably from the second half of 2019 onwards as the order book rolls off. The midsize tanker order book, when measured as a percentage of the existing fleet, currently stands at just below 8%, which is the lowest in over 20 years. Furthermore, there are a large number of older ships in the world fleet which will likely face scrapping in the coming years. This is illustrated by the chart on the top right of the slide which compares the size of the Suezmax and Afromax order books to the fleet of older vessels. Clearly, the fleet of older vessels that face scrapping is far larger than the current order book which supports our view of continued low freight growth in the coming years. The chart on the bottom of the slide shows our forecast for Suezmax and Afromax fleet growth out to 2020. Fleet growth this year is expected to be higher than last year due to low scrapping levels. However, much of this growth has already taken place during the first four months of the year, particularly in the Suezmax sector, where 22 out of the 28 vessels due to deliver in 2019 have already entered the trading fleet. The fleet growth should therefore be far lower in the second half of the year and will be further offset by vessels being removed from the fleet for the installation of scrubbers. In 2020, we're forecasting less than 1% growth in both the Suezmax and Afromax sectors, paving the way for a more sustained tanker market recovery. Turning to slide seven, we look at our tanker fleet utilization forecast out to 2020. The chart illustrates our view of an improving freight market this year and next. A strong demand growth spurred by IMO 2020 and an increase in long-haul oil movements is expected to outstrip fleet growth by a considerable margin. This should lead to higher global fleet utilization, which should drive a much firmer tanker market starting in the second half of 2019. Turning to slide eight, although rates have declined from the highs reached at the end of 2018 and the first quarter of 2019. Our crude tanker spot rates in the second quarter of 2019 to date are much stronger than the second quarter of 2018. Based on approximately 61% and 55% of spot revenue days booked, TK Tankers' second quarter to date Suezmax and Afromax bookings have averaged approximately $17,300 and $21,200 per day, respectively. For our LR2 segment, with approximately 54% of spot revenue days booked, second quarter to date bookings have averaged approximately $15,000 per day. As you'll note in the appendix of this presentation on slide 17, Q2 is a heavy dry docking quarter, 10 vessels and 301 days of off-hire projected. This proactive planning of required dry docks will help us to have these vessels available to maximize our earnings and cash flow during what we believe will be a firming freight market starting in the second half of the year. In closing, given our previously mentioned near-term outlook for spot tanker market headwinds, the losses incurred over the last two years and the incremental debt the company has taken on from recent financing transactions to improve our liquidity position We intend to continue prioritizing paying down debt in 2019 before resuming dividend payments. If the market continues to strengthen as we anticipate in 2020, the excess cash flow will allow us to broaden our capital allocation options to include a resumption of dividend payments and potential share buybacks in addition to further deleveraging, all of which align with our commitment to drive value creation for our shareholders. With that, operator, we are now available to take questions.