Teekay Tankers Ltd.

Welcome to TKTanker's limited second quarter 2020 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 star 1 to register for a question. For assistance during the call, please press star 0 on your touchtone 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.tktankers.com, where you'll find a copy of the second quarter 2020 earnings presentation. Kevin and Stuart 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 cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter of 2020 earnings release and earnings presentation available on our website. I'll now turn the call over to Kevin McKay, TK Tanker's President and CEO, to begin.

Kevin McKay Thank you, Ryan. Hello, everyone. Thank you very much for joining us today for TK Tanker's second quarter 2020 earnings conference call. And I hope that you and your families are all safe and healthy. Joining me on the call today are Stuart Andrade, TK Tanker's CFO, and Christian Waldegrave, Director of Research. Before we review our results, I would like to say thank you again this quarter to all of our seafarers and shore-based staff for their continued extraordinary efforts in bringing energy to the world with TK Spirit during the COVID-19 pandemic. The unprecedented impact of COVID-19 continues to be a major area of focus for us. Unfortunately, we have thus far successfully navigated the evolving logistical and regulatory challenges with minimal impact on our operations. Moving to our recent highlights on slide three of the presentation, TK tankers generated total adjusted EBITDA of approximately $124 million during the second quarter, an increase of $88 million from the same period of last year. We reported adjusted net income of approximately $81 million, or $2.39 per share, in the second quarter, up from an adjusted net loss of $12 million, or $0.36 per share, in the second quarter of 2019. TK Tankers has experienced a strong first half of 2020, reporting total adjusted EBITDA of approximately $280 million, an increase of $180 million over the same period of last year, and adjusted net income of approximately $191 million, or $5.66 per share, compared to approximately $3 million, or nil cents per share, in the first half of 2019. TK Tanker's first half of 2020 annualized adjusted earnings per share yield of 71.2% was among the highest in our industry, clearly demonstrating the earnings power of our business. We have continued to strengthen our balance sheet this quarter with strong free cash flow from operations of $126 million and the opportunistic sale of a non-core asset. This contributed to a net debt reduction of over $180 million, or 25%, to $549 million and increased our liquidity position to $468 million as of June 30th. Our net debt total capitalization declined to 31.5% at the end of June compared to 40% at the end of Q1 this year. Further strengthening our balance sheet post Q2, we received the final payment of $12.6 million in July from the previously announced $27.1 million sale of our STS support business and recognized a gain on sale of $3.1 million in the second quarter. In addition, in August, the company secured a three-year $67 million term loan to refinance a debt facility secured by four Suez Maxes that was scheduled to mature in 2021 at an attractive rate of LIBOR plus 225 basis points. With the completion of this loan, the company does not have any debt maturities until 2023, further improving our financial stability. The health and safety of our crew and shore staff remains paramount. Strict measures have been implemented on all of our ships to protect our seafarers To date, we have had no cases of coronavirus reported onboard our vessels. The maritime industry has experienced significant challenges with regards to crew changes due to issues related to travel restrictions, flight availability, visa applications, and restrictions by many ports in allowing crews to disembark from vessels. Despite these challenges, I am pleased to report that we have safely changed out a large portion of our seafarers on our vessels. However, approximately 36% of our overdue crew members are yet to be relieved. We continue to work diligently with both industry and intergovernmental organizations to tackle this challenge and relieve our remaining overdue colleagues as soon as possible. I am truly proud of how our seafarers and onshore colleagues have responded to ensure crew rotations are completed safely and seamlessly with no interruption to the service we provide our customers. In the freight market, crude tanker spot rates for the second quarter remained firm, and the last three quarters' average spot rates were the highest in the past 12 years. Entering the third quarter, our built-to-date spot rates have weakened, which I'll touch on in more detail in the next slides. The impact of this recent weakness in the spot market is mitigated somewhat, however, by our well-timed fixed-rate contracts secured over the last few months at a very attractive rate. which have reduced the free cash flow break-even for our spot fleet to approximately $12,700 per day through to mid-2021. We currently have 13 vessels on fixed-rate charters at an average rate of $39,100 per day. Turning to slide four, we look at recent developments in the spot tanker market. As mentioned, Q2 saw the third consecutive quarter of strong spot tanker rates. Rates were particularly firm in the early parts of the quarter as elevated crude trade volumes due to the short-lived oil price war between Saudi Arabia and Russia led to strong tanker demand. Floating storage also gave support to rates as a significant mismatch between elevated levels of global oil production and depressed oil demand resulted in a large surplus of both crude oil and refined products. Onshore storage filled rapidly. and with the crude oil futures curve moving into a steep contango, oil moved into floating storage, peaking at well over 10% of the trading fleet in mid-May. The market landscape shifted midway through the second quarter, and a weaker spot rate environment has emerged in recent weeks, driven by lower global oil production and the return of some ships from floating storage. OPEC and its partners implemented record oil production cuts of 9.7 million barrels per day between May and July, with Saudi Arabia, the UAE, and Kuwait adding further cuts of 1.2 million barrels per day during June. Compliance with these cuts has been relatively high and has led to a significant reduction in crude trade volumes. Oil production has also declined in non-OPEC countries due to the impact of weaker oil prices, with total global oil production falling by close to 14 million barrels per day between April and June. In addition, floating storage has come off from the record highs seen in May, which has released some ships back into the trading fleet. Taken together, a reduction in trade volumes coupled with ships returning to active trading has put pressure on crude tanker spot rates during the latter part of the second quarter, and this weakness has continued into the early part of Q3. Turning to slide five, we give a summary of our fixed rate chargers and our spot fixtures in the third quarter of 2020 to date. TK Tankers has been proactive in managing the fleet, locking in attractive fixed rates charters during periods of significant strength in the tanker market over the past few quarters. We currently have 23% of our fleet on fixed rate contracts, an average rate of $39,100 per day. Moving to our spot fleet, based on approximately 57%, and 51% of spot revenue days booked. TK Tanker's third quarter to date Suezmax and Afromax bookings have averaged approximately $24,800 and $15,600 per day respectively. Although these rates have weakened from the last quarter, spot rates are higher than the third quarter of 2019, indicating stronger underlying supply and demand fundamentals. For our LR2 fleet, which are all currently trading dirty, based on approximately 42% of spot revenue days booked, third quarter of the day bookings have averaged approximately $14,400 per day. Combining our fixed rate chargers with our spot fixtures so far in Q3, our Suezmax fleet has 73% of its Q3 revenue days fixed at $33,500 per day. Our AfraMax fleet is 56% fixed at $17,600 per day, and our LR2 fleet is 48% fixed at $17,400 per day for the third quarter of 2020. We have intentionally scheduled the majority of our dry dockings in the third quarter, which has allowed us to capitalize on the strong earnings environment in Q1 and Q2 of this year, while removing vessels for maintenance during the current weak rate environment that we're experiencing now. Further details of our fixed rate charters and our docking schedule can be found in the appendix in the presentation. Turning to slide six, we look at some of the opposing supply and demand factors, which will impact the tanker market over the next 12 to 18 months. After declining by over 20% year-on-year in the second quarter, global oil demand is projected to rebound during the second half of the year and to continue its recovery during 2021. According to the IEA, global oil demand is expected to increase by 14 million barrels per day between Q2 and Q4 of this year, and refinery throughput is expected to increase by 9 million barrels per day over the same period. This should be positive for tanker demand, though we must caveat this view by acknowledging the high degree of uncertainty associated with oil demand forecast in the current environment, with much depending on how various countries and regions managed to contain the spread of COVID-19 over the coming months. Global oil production is also a turning point, with production expected to increase during the second half of the year as both OPEC and non-OPEC countries return supply to the market. The OPEC Plus group is set to return 2 million barrels per day of production from August onwards, though this may not be fully translated into additional export volumes in the near term as Saudi Arabia has pledged to keep its extra production for domestic use during the summer months when local power demand is higher. Non-OPEC oil production could also start to rebound in the coming months, with global oil prices having stabilized around $40 per barrel. Although oil market fundamentals are improving, we expect that the coming months will be challenging ones for the tanker market, as vessels return to active trading from floating storage. As shown by the chart on the right, over 150 tankers of Afromax size and above remain in floating storage. Although this is a decline from the peak in mid-May, it still represents approximately 7% to 8% of the fleet. The contango in crude oil prices no longer supports floating storage, and an emerging global oil supply deficit is expected to lead to a drawdown of storage volumes from Q3 onwards. As such, we expect a significant portion of the floating storage vessels to return to the trading fleet by the end of the year, which will add to fleet supply. Overall, we expect a weaker tanker market during the second half of 2020, especially in comparison to the strong first half we've just enjoyed. There is, however, the potential for some volatility to occur during the fourth quarter as seasonal weather disruptions and choke points, such as the Bosphorus Canal, provide logistical constraints in certain regions. Turning to slide seven, we look at the positive fleet supply fundamentals. E-tanker ordering remains very low due to a more restrictive financial landscape than in the past, and uncertainty over the impact of upcoming environmental regulations we'll have on the choice of future vessel propulsion systems. This lack of contracting has led to a shrinking order book, which currently stands at a 24-year low of just over 7% of the existing world fleet. To put this into context, during the past two market cycle peaks in 2008 and 2015, the order books stood at 50% and 20% of the fleet, respectively. Further to that, the tanker fleet is also aging, as shown by the chart on the right of the slide. There are currently 115 midsize tankers which are aged 20 years old or are due to turn 20 over the next two years. This compares to an order book of 140 vessels, which were expected to deliver over the same timeframe. Given that most tankers leave the international trading fleet at age 20, we'd anticipate minimal net fleet growth in Suezmax and Afamax fleets over the next two years. The same chart shows there are 255 vessels in the 15 to 17 year age bracket, which will need to go through their 17 and a half year intermediate survey over the next couple of years. With the additional CapEx that will be needed for the installation of ballast water treatment systems, we may see some additional vessels in this age group also being scrapped in anything but a strong market, further offsetting the limited number of vessels delivering into the fleet. We must note that so far this year, scrapping activity has been low due to a combination of stronger freight rates in recent quarters, low scrap prices, and the shutdown of many scrapyards due to COVID-19. However, we are starting to see shipyard activity returning, which in combination with a weaker freight environment could lead to increasing levels of tanker scrapping as we close out 2020 and get into 2021. In sum, the tanker market looks set for a more challenging period in the coming months, following a very strong first half of the year. However, we remain encouraged by the tanker fleet supply fundamentals, which are far more favorable than we've seen in previous market cycles. I'll now turn the call over to Stuart to cover our financial slide.