Teekay Tankers Ltd.

Good day and welcome to TK Tankers Ltd. Second Quarter 2019 Earnings Results Conference Call. During the call, our 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, 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'll find a copy of our second 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' second quarter 2019 earnings conference call. With me here in Vancouver, I have Stuart Andrade, TK Tankers' chief financial officer, 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 $36 million during the second quarter, up from $17 million in the second quarter of 2018. We reported an adjusted net loss of $12 million or $0.05 per share in the second quarter up from an adjusted net loss of $29 million or $0.11 per share in the second quarter of 2018. Our improved quarterly results year-on-year points to the improved underlying fundamentals in the market this year. However, they were impacted by seasonal factors as well as some near-term headwinds, which I will touch on in more detail on the next slide. The continued strong growth of U.S. crude exports has helped bolster our full-service lighterage business and drove our average AfriMax crude tanker spot rates to over $20,000 per day during the quarter. While spot tanker rates during the second quarter were significantly higher compared to the same period of the prior year, Rates in the third quarter thus far have been affected by seasonal summer weakness. However, supply and demand fundamentals are signaling towards a firming tanker market in the latter part of 2019 and into 2020. I'll cover our market outlook in more detail later in the presentation. Turning to slide four, we look at recent developments in the spot tanker market. As shown by the chart on the left, Last quarter saw our strongest Q2 earnings since 2016, with average Afromax rates being particularly strong, the reasons for which I'll highlight in the next slide. Rates have weakened at the start of the third quarter, which is partly due to normal seasonality and partly due to some near-term headwinds. However, the chart on the right illustrates the increase in rate volatility we have witnessed this year compared to the same period of last year, which would indicate a tightening of the supply-demand balance. This is an encouraging sign as we head towards the seasonally stronger fourth quarter. Turning to slide five, we look at the growth in U.S. crude oil exports and how this has led to increased lightering demand and our improved AfriMax earnings. U.S. crude oil exports continue to set new highs, with exports averaging 3 million barrels per day during the second quarter. Approximately 50% of all crude oil exports from the U.S. have been shipped to Asia in 2019, with a large increase in cargo volumes to India and South Korea replacing volumes to China that have decreased. These volumes to Asia are primarily carried on VLCCs, which require reverse lighterings via Afromaxes due to draft constraints in U.S. ports. This has led to an increase in lightering demand, with rates commanding a premium to the Aframax spot voyage market. This boosted our Aframax earnings in the second quarter by around $4,000 per day compared to the peer group average, demonstrating the value contribution of our full-service light ridge business. U.S. crude oil exports are projected to continue to rise over the next 18 months as new pipeline capacity linking the Permian Basin to the U.S. Gulf Coast is completed. As shown by the chart on the slide, U.S. crude oil exports are anticipated to reach 4 million barrels per day by the end of this year and could rise to as high as 5 million barrels per day by the end of 2020. This should be positive for mid-size tanker demand due to the further increase in both Afromax Light Ring demand and direct exports to Europe on Afromax and Suezmax vessels. Turning to slide 6, as discussed earlier, Normal seasonality and near-term headwinds have impacted our rates through the early part of the third quarter to date. Based on approximately 37% of spot revenue days booked, TK Tankers' third quarter to date Suezmax and Afromax bookings have averaged approximately $15,600 and $12,800 per day, respectively. For our LR2 segment, with approximately 32% of spot revenue days booked, and the third quarter to date bookings have averaged approximately $12,200 per day. However, turning to slide seven, market fundamentals point towards a tightening of supply and demand drivers through the latter part of 2019, which is anticipated to lead to increased volatility, which typically moves freight rates higher. Starting with demand, we continue to see several positive factors which will help drive a tanker market recovery in the coming months. Global refinery throughput is projected to be 2.4 million barrels per day higher in the second half of this year, which should create a significant uplift for crude tanker demand. In addition, a boost from the upcoming IMO 2020 regulations may also lead to new trade patterns and arbitrage movements, floating storage and increased port congestion. Higher U.S. crude oil exports, as detailed in the previous slide, should also be a positive factor as new Permian Basin pipelines come online in the coming months. We do also acknowledge, however, that some of the demand side factors look less positive than at the start of the year. Global oil demand estimates have been revised down to 1.1 million barrels per day in 2019. However, the IEA projects a rebound to 1.4 million barrels per day demand growth for next year. OPEC's decision to extend supply cuts through to March 2020 is also a negative for near-term crude tanker demand, although it should be noted that Saudi Arabia is currently producing around half a million barrels per day below their agreed production target, which gives them scope to increase supply without having to revisit their official policy. Finally, the impact of U.S. sanctions on Venezuela continues to have a negative impact on mid-sized tanker market in the U.S. Gulf carriage market. Turning to fleet supply, the next two years look set to be a period of low fleet growth due to a shrinking order book, which currently stands at just under 9% of the existing fleet size, the lowest since 1997. Shipyards are currently booked through to mid-2021, which gives us a two-year runway where fleet growth is expected to be only around 2% versus a historical average of around 5%. Fleet growth could be further dampened in coming months by an increase in off-hire time as vessels are taken out of service to retrofit scrubbers. The one negative is that tanker scrapping has been lower than anticipated in the first half of the year, which is leading to slightly higher fleet growth so far than was forecast. Turning to slide 8, we look at our tanker fleet utilization forecast out to 2020. We have updated our outlook based on the changes to the supply and demand factors identified in the last slide. While this has led to a slight downward revision to our forecast, it should be highlighted that utilization rates around 86% or higher generally reflects tight market conditions, which should lead to an improved market developing through 2020, with tanker fleet utilization approaching the 90% mark. Tanker market fundamentals continue to support market recovery in the latter part of the year. And with a healthy liquidity position and significant operating leverage, we believe TK Tankers is well positioned to benefit from improving market conditions over the coming year. Turning to slide nine, before we open the line for questions and answers, I would like to invite you to TK Tankers Investors Day at the Grand Hyatt Hotel in New York on October 2nd, where the management of TK Tankers will provide an update on the strategy and outlook for our business, as well as an in-depth review of our outlook for the crude tanker shipping market. Registration starts at 8 a.m. Eastern time, with presentations between 8.30 a.m. and 11.30 a.m. Eastern, followed by one-on-one meetings. Please RSVP at the link on slide nine If you would like to have one-on-one meetings, please contact Emily Lee at emily.yee at tk.com. We look forward to seeing you all there. With that, operator, we are now available to take questions.