Teekay Tankers Ltd.

Welcome to TKTanker LTD's first quarter 2021 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, 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 will 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 will find a copy of the first quarter 2021 earnings presentation. Kevin and I 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 first quarter 2021 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin McKay, TK Tanker's President and CEO, to begin.

Thank you, Stuart. Hello, everyone. Thank you very much for joining us today. for TK Tanker's first quarter 2021 earnings conference call. I hope you and your families are all safe and healthy. Joining me today on the call are Stuart Andrade, TK Tanker's CFO, and Christian Waldegrave, Director of Research for TK Tankers. Moving to our recent highlights on slide three of the presentation. TK Tankers generated total adjusted EBITDA of approximately $16 million during the first quarter, an increase of $6 million from the fourth quarter of 2020. We reported a total adjusted net loss of approximately $22 million, or 65 cents per share, during the first quarter, an improvement from an adjusted net loss of $41 million, or $1.21 per share, in the fourth quarter of last year. Our improved results are largely due to higher spot tanker rates during the quarter and supported by revenues from several lucrative fixed rate charters secured during periods of market strength at rates substantially higher than first quarter spot rates. Despite a challenging quarter, we have maintained our strong balance sheet with liquidity of $372 million and a net debt capitalization of 32% at the end of the first quarter of 2021. Our strong financial position has enabled us to continue reducing our overall cost of capital on an opportunistic basis. In March, we declared additional purchase options on six vessels currently on sale leasebacks, bringing our total of such purchase options exercised since November 2020 to eight vessels, with the transactions expected to close in May and September. Lastly, while improved relative to last quarter, The tanker market weakness continued into the first quarter due to lower oil demand as a result of the ongoing impact of the COVID-19 pandemic. However, midsize tanker rates did see a spike in March as a result of bad weather and the Suez Canal blockage. Looking ahead, although we expect near-term headwinds with the continued impact of COVID-19, we are seeing early positive signals that indicate a market rebound starting in the second half of 2021, which I will touch on in more detail later in the presentation. Turning to slide four, we look at recent developments in the spot tanker market. Spot tanker rates remained generally weak during the first quarter as COVID-19 continued to have a negative impact on tanker demand. Global oil demand fell by around a million barrels per day in Q1 due to a resurgence in COVID-19 cases over the winter months in several countries. OPEC continued to limit oil production during the first quarter, with Saudi Arabia implementing an additional voluntary supply cut of a million barrels per day from February in response to weaker oil demand. Finally, the first quarter saw further 4.5 million deadweight tons of tankers returned to the trading fleet from floating storage, adding to available fleet supply and worsening the supply-demand imbalance. While overall the first quarter was a weak quarter in terms of spot rates, we did see some great spikes during the month of March, as shown by the chart on the right. Most notably, Afromax rates reached $20,000 per day on some trade routes. These spikes were driven by bad weather in the U.S. Gulf and Mediterranean and the blockage of the Suez Canal towards the end of the month, both of which caused disruption and boosted rates for a short period of time. Although these temporary disruptions have now ended and rates have reduced at the start of Q2, it is encouraging to see a positive rate reaction to these factors in what was otherwise a depressed quarter for rates. And it is perhaps a sign that the worst of the market may now be behind us. Although spot tanker rates were weak during Q1, TNK managed to mitigate the impact through its fixed rate time charters as shown by the chart on the left. This is particularly true for our Suezmax fleet, where our fixed rate charters lifted overall Suezmax earnings to around $16,800 per day versus spot earnings of around $10,700 per day. Turning to slide five, and provide a summary of our spot rates in the second quarter to date. Based on approximately 55% and 49% of spot revenue days booked, TK Tanker's second quarter to date Suezmax and AfraMax bookings have both averaged approximately $10,500 per day. For our LR2 fleet, which are predominantly trading dirty, based on approximately 49% of spot revenue days booked, Second quarter date bookings have averaged approximately $11,900 per day. Turning to slide six, we look at some of the key indicators which we believe point towards a future tanker market recovery. First, we acknowledge that there is still uncertainty in the near term due to the ongoing COVID-19 pandemic. and its potential to further disrupt oil demand as new outbreaks occur. This has been highlighted recently by the devastating outbreak in India and rising case numbers in several other countries. While first and foremost a human tragedy, the increase in cases also has the potential to lower oil demand and possibly oil imports to the detriment of spot tanker rates. However, if we look further ahead through the remainder of 2021 and beyond, There are a number of reasons for optimism, as several of the key indicators that we track have improved since the start of the year. Firstly, the global economic outlook is improving, with the IMF recently increasing their forecast for global GDP growth in 2021 from 5.5% to 6%. As a result of this revised outlook, the IEA have increased its forecast for global oil demand in the second half of the year by 0.3 million barrels per day to 98.9 million barrels per day. More importantly for the crude tanker market, the IEA expects crude throughput at refineries to increase by 6.6 million barrels per day between April and August of this year, which should create significant crude tanker demand. Oil inventories, which increased significantly in the second half of 2020, have been drawn down significantly due to the production cuts of the OPEC Plus group of oil producers and are now almost back to the five-year average. The combination of normalized inventory levels and rising oil demand as we move through the second half of 2021 should result in more oil production, with OPEC Plus indicating their intention to return the supply of 2.1 million barrels per day between May and August. In order to meet rising demand, we believe that further such increases will be necessary, and it is this additional production that really should help rebalance tanker supply with demand, increasing fleet utilization, and helping to kick-start a tanker market recovery. The fleet supply side continues to look very positive, with the order book as a percentage of the fleet currently at approximately 8 percent, very close to historic lows and well below the long-term average of around 20 percent. Rising new build prices spurred by an increase in steel price and a very large amount of ordering in the container ship sector since the start of the year are acting as a deterrent to tanker new building orders. We've also seen a modest increase in recycling numbers since the start of the year, though we would look for a more substantial increase in demolitions if, or more likely when, sanctions on Iran are lifted and the fleet of older ships currently serving sanctioned trades are phased out. Overall, market conditions indicate very low levels of fleet growth for the next two to three years, which should help facilitate a tanker market recovery once demand starts to normalize and improve. In summary, it appears that we may be past the worst of the tanker market downturn. And although the next few months still appear challenging due to the uncertainties of COVID-19, we are increasingly positive on the longer-term fundamentals, which we believe will underpin the tanker market recovery. This belief is already being reflected by the wider market through higher time charter rates and asset values. the second-hand AfriMax values increasing by up to 20% since the beginning of the year. I will now turn the call to Stuart to cover the financial slide.

Thanks, Kevin. Turning to slide 7, we highlight the company's strong financial position. As Kevin mentioned in his opening remarks, we have maintained our strong balance sheet, which provides us with financial strength and flexibility. We have a liquidity position of $372 million and a net debt to capitalization of 32% at the end of the quarter. One of our strategic priorities is to reduce our cost of capital. In March, we exercised purchase options for an additional six vessels for $129 million. In total, we have exercised purchase options on eight vessels that are currently on high-cost sale leaseback financings for approximately $186 million. two of which closed in May, with the remaining vessels closing in September. We are currently in the process of negotiating term sheets to refinance these eight vessels with lower-cost sale-leaseback financings. Lastly, having reduced a significant amount of debt in 2020, our debt repayment profile is very manageable in the coming years, with no significant debt maturities until 2024. With that, I will turn the call over to Kevin to conclude.

Thanks, Stuart. I would like to say thank you once again this quarter to all of our seafarers and shore-based staff for their continued dedication to providing safe and uninterrupted service to our customers during these challenging times. As we hopefully move closer to a more normalized world, at TK, we will continue to focus every day on the safety and well-being of our seafarers, as we have done since our inception nearly 50 years ago. Finally, with a strong financial position and high operating leverage, we believe that TK Tankers is well positioned to weather the current market challenges and benefit from an anticipated tanker market recovery. With that, operator, we are now available to take questions.

Thank you. If you wish to ask a question, please signal by pressing star 1 on the telephone keypad. If you're using your speakerphone, please make sure your mute function is turned off to allow the signal a chance to reach our equipment. Again, press star 1 for a question. We'll now pause for just one moment. We will take our first question from John Chappell from Evercore. Please go ahead.

Thank you. Good morning or good afternoon, wherever you are. First question for you, out of the 186 of the leases that you were able to negotiate, you said that you're using cash and new sale and lease packs to pay those off. I understand the term sheets are still in process right now, but roughly how much of new debt do you foresee replacing that 186 versus current liquidity that you have today?

Hi, John. Yeah, we're actually just finalizing those term sheets, so we've got a pretty good handle on that. Out of the 186, we will be refinancing $140 million with the new lower-cost sale leasebacks and using about $45 million of existing liquidity for the remainder.

Okay, that's helpful. And then, I know, once again, you're negotiating the terms, but Just roughly speaking, because when you see a sale and lease back being replaced with a sale and lease back immediately, my mind goes to why don't you just use your existing undrawn facilities because sale and lease backs are still a higher cost of debt. Is there a rough estimate of what the spread benefit will be, so to speak? So the amount of basis points you'll save from the new facilities versus the average of the aid that you'll be replacing?

Yeah. So on the portion we're pulling from a revolver, obviously there's substantial savings. On the spread for the $140 million, the spread is about 5% if we fix that out, and actually larger than that if we allow it to float for now. So it's actually very substantial savings. We're probably looking at a minimum of $8 million in 2022 in interest savings from doing that.

Okay, that's huge. Um, and then finally, Stuart, the, uh, it's just refresh my memory again. I think I asked this every quarter, but after these eight, um, I believe you still have some, uh, selling these bags from, from a prior time with this, with the high level of interest rates, what's the timing on potential expiration or renegotiation, uh, for the remainder of those.

Yeah. So we still have six vessels after, after these ones redeliver, we'll have six vessels on sale, lease back arrangements that we had, we had done a few years ago. The interest rate on those is quite a bit lower. It's more in the 6% range. But the total amount outstanding on those is about $160 million. Not something that we're focused on immediately, but of course as the market turns and we start generating more cash flow, we'll look to continue to try and bring down our cost of capital. But at the moment, we won't be doing anything with those ones in the near term.

Okay, that makes sense. And final one for me, Kevin, big picture. You've done everything you set out to do 18 months ago at the last investor day, you know, taking down a lot of this low cost debt. You've gone through a pretty significant downturn, admittedly after a huge upturn, you know, without having any liquidity concerns whatsoever. As you sit here on the precipice of what you think is going to be a recovery, it may not start tomorrow, but sometime in the very near future, how do you feel about the capital structure and the fleet today? And is it continuing to do what you've done the last 18 months or do you start to become more aggressive with either the operational or the financial leverage?

That's a good question, John. I think, you know, At the moment, we still, as I said in my remarks, we still face a little bit of uncertainty around COVID-19. You know, the fundamentals in the background are definitely pointing in the right direction, but I think it still pays to be prudent. So we're not rushing to come up with, you know, a definitive solution. execution plan for this quarter. I think we'll continue to do what we've been doing, strengthen the balance sheet, look to pay down the expensive debt. And as we sit here today, we've got a 50 ship fleet that's exposed to a market that we anticipate will pick up. certainly as we move through the back end of this year and into next year. So I think we're well positioned to reap the benefit of a lot of the hard work that we've done over the last 18 months. But for now, the focus is let's continue to do what we're doing and let's see how the uncertainty over the next few months or possibly quarter plays out. And then we'll take it from there.

Yeah, that makes sense. Thanks, Kevin. Thanks, Stuart.

Thanks, John.

Thanks, John.

We will now take our next question from Randy Givens from Jeffers. Please go ahead. Howdy, gentlemen. How's it going?

Good. Thanks, Randy.

Doing well. Excellent. Two questions for me. First, I guess, how do you view the kind of outlooks for product tankers compared to crew tankers? at this point in the cycle? And are you using this maybe soft patch to clean up some of your LR2s that were trading dirty to start trading clean again in the near term?

Yeah, I think we've got nine LR2s, the bulk of which have been trading dirty purely because of the returns we're getting in comparison. We have seen a little bit more volatility in LR2 trades over the last, say, six months, and that prompted us a few months back to look at maybe changing over one or two into the product trade. Since then, obviously, the trade hasn't really picked up, and I think LR2 rates on a round-trip basis aren't necessarily as good as some of our U.S. Gulf returns on the crude side. But at the moment, we've got two ships that are trading clean primarily in the Far East, and I think for the time being, that's as far as we're going to go until we start seeing a bit more definitive green shoots in the product space. But overall, you know, you've still got large inventories on the product side in Europe that I think is going to be a bit of a drag. Our view is, you know, the vast majority of our exposure will be in the crude space, and we're confident the fundamentals are lining up for that over the coming quarters.

Okay, so you're not necessarily a believer that refined products will lead with all of the refinery dislocation and then kind of increased demand for jet fuel prior to an inflection in crude demand.

No, I think the product trade has always promised a lot and never necessarily delivered it as when people thought it was going to happen. So we do have exposure. We can increase it from two ships to nine. But at this point in time, we're not seeing that. And as a result, we're trying to make as much money in as bad markets as we can. And today for us, that is trading our ships dirty.

Yep. All right, and then second question, you know, you mentioned your recent time charters helped buoy your Suez Max rates during the salt patch in the first quarter. Any further appetite for signing some six-month, one-year time charters to kind of stabilize cash flow here over the next, you know, uncertain period?

In terms of putting our ships out?

Correct.

Yeah. Yeah, I think we... whether it's in or out, we look at it opportunistically. It's finding the right customer with the right ship in the right position to be able to pull the trigger at the right number. So far, we haven't seen that yet. We had a a nice transaction that we were able to do to bring in a ship earlier in the year. But on the out charters, we haven't really seen the numbers that we would be willing to lock in at for 12 months. There may be some opportunities within the regional fleets to put out for six months, but it's not something we try and plan to do. A lot of it depends on traders who come up with positions they need to fill, and then we look at it on a case-by-case basis.

Yeah, that's fair. All right. Well, I think that's it for me. Thanks so much.

Thanks, Randy.

We will now take our next question from Ken Hexter from Bank of America. Please go ahead.

Hey, great. Kevin Stewart, Christian. Good afternoon. Maybe just a question for Christian, or I don't know if, Kevin, you want to throw out, but how much more is left in storage? You talked about a little bit of the overhang caused by a couple million barrels still coming out of storage. Maybe talk to us from your view of what's still left to impact those rates.

Yeah. Hi, Ken. It's Christian here. In terms of the land-based storage, it does seem like we're pretty much down to five-year averages now. If you look at the IA report that came out yesterday, I think they said that in the OECD, the inventories are only about two million barrels above the five-year average compared to 250 million barrels in the middle of last year. So certainly the land-based storage is looking like it's back to normal levels. And then on the floating storage, that's also almost back to normal levels as well. Certainly in the mid-sized tankers, there aren't really any AfroMaxes or SuezMaxes doing storage contracts beyond what we would normally expect in a typical market. There maybe are 10 to 15 Vs that are still doing storage that might come back. By and large, I think we're almost at a normal market now in terms of inventories, which, of course, is positive because it means as demand recovers through the second half of this year, it will create a deficit of oil that needs to be filled. So we do certainly expect that OPEC will increase production through the back end of this year over and above the 2.1 million barrels a day that they've already pledged between now and July, which, of course, is going to be very positive for tanker demand.

So then with that, so, I mean, the environment set up there sounds great, but talk about the spot rate softness you've seen in 2Q relative to, I guess, the 50% of the spot rates booked. Do you think we see downward pressure on what you've booked through May and June, or are we finding a floor? Maybe just talk about that relative to what you've booked.

I think we've... I think we've found the floor, to be honest. You never know in tankers what disruptions might occur. We saw in March a very good spike for Afromaxis. That was caused by weather and obviously the Suez Canal for about a 10-day period. But I think at these levels, roundabout these levels should be where where we go. I think one of the challenges we've faced over the last six months, we have seen more volume, more fixing volume come into the markets, both on Afromax and Suezmax. The challenge has been that we've seen the unwinding of this floating storage, which has negated all of that activity. So hopefully, as now that we're down to sort of normalized floating storage levels, If the activity continues to increase and we see more Russian barrels coming out of the Black Sea and the Baltic, that should help both Suez Max and AfriMax rates in the Atlantic. And I think maybe that might help improve a little bit on the quarter, but I think it's too early to tell. It's not going to be a great quarter. We know that. It's not going to miraculously improve overnight, but I think steady improvements could be seen going forward.

Sorry for the minor one for Stuart, but the voyage expenses were elevated in the first quarters given the increase in spot days. Just any thoughts on that going forward? Obviously, last year was was very different than normal, just given COVID impacts, expect similar levels on expenses?

Yeah, voyage expenses are, as you said, correlated with the number of spot days that we have. So there's two things going on there. The other one is the re-delivery of our time charter fleet. So we had a number of vessels out on time charter. And as those come back into the fleet, we start paying voyage expenses on those. So that's a normal movement you would expect. But we have a small outcharter fleet now, so voyage expenses should be, you know, relatively stable subject to, you know, movements in fuel costs.

All right. Wonderful. Just wanted to see if there was anything different in there. And then I guess just, Kevin, do you think about, you know, if we start seeing a rebound in the market, do you like the fleet size? Do you feel you've got the mass scale you want? Do you look to sell anything? And, you know, if we're starting to see asset values go up, You mentioned kind of the rechartering rates, your sale leasebacks. How do you think about the fleet scale here as we see that into a rebound, hopefully rebounding market?

Well, I think as we look at T&K today, I think the company is very well positioned at this point in time with a 50-ship fleet that's increasingly, as those time charters and the Suezmax size have rolled off, will be increasingly weighted towards a spot market that, as we've said, we think should start to improve as we move through the latter half of this year. So whether we add to that exposure, whether it's through time charter additions or asset purchases, I think we'll have to see what opportunities arise that present good value. You know, asset prices have moved up this year quite rapidly. So I don't think you're going to see us go out and reach out and pay up to add another 10 ships to the fleet. It's definitely not necessary with a 50-ship fleet, and I don't think it would be prudent at these price levels. So I don't think you'll see us embarking on a buying spree, but if there's one-off opportunities where we see a deep discount or a good value to add, we may transact. On the other hand, as you said, with asset prices going up, we could also be sellers. If we get the right opportunities at the right price for some of our older vessels, we may decide to transact and lock in some of that value there. So I think we're agnostic. We're both buyers and sellers, in charters and out charters. I think where the market could go to, we need to remain flexible and agile. And I think we'll look at each and every opportunity on a case-by-case basis and transact only when we think there is value to be had.

That's helpful. I guess I'll just throw in there, do you see more, you know, if you were to put more chance of upside, I would presume you're going to say you see more chance of of rising given that comment on the floor of rates, then you would see more pressure on the downside, so more opportunities.

Yeah, I think the fundamentals are pointing towards improvement. I think that we've also, you know, we face a pandemic that is uncertain. So we have to be prudent and not dive in with both feet right at the starting whistle. So I think, as I said to John on his first question, I think it pays to be prudent and to be cautious. But our outlook going forward is definitely for improvement as we move into the back end of this year and into 22 and 23. So I think opportunities will come up.

Great. Appreciate it, Kevin, Stuart, Christian. Thank you for the thoughts and time.

Thanks, Ken.

We will now take our next question from Magnus Fehr from H.G. Wainwright. Please go ahead.

Thank you. Good afternoon. Just a follow-up question on Ken's question. What, I mean, you spent the last couple years strengthening your balance sheet. Can you talk a little bit more how you feel about fleet renewal over the next couple years? I mean, you have a strong cash position and, you know, you have stricter upcoming emission targets. I'm just curious how you think about that going forward.

Yeah, like I said, we're very comfortable with where T&K stands today. Our average fleet age is 12 years, which is more than manageable. We've got good franchises in the U.S. Gulf and in the Far East where we can trade younger ships and older ships alike without any restrictions. And over the years, we've invested in our fleet. We've spent the money on improvements to make them more fuel efficient. So, the upcoming regulations in 2023 don't scare us. We've made good improvement over recent years in terms of reducing our emissions. So, at this point in time, we do realize that every year our fleet gets older and we will have to start investing in newer tonnage. But where we sit today, we don't think that that's a decision that we've got to rush into. We think we have time and we think we have a fleet that we can continue to trade for years to come. I think if you look at The regulation that may be coming, that is also an uncertainty. And to rush to order new builds with propulsion systems that may be less efficient compared with technology that gets developed over the coming years or doesn't quite meet regulations that may be coming up that we don't know about. We just feel that at this point in time, it's better to sit and trade the fleet that we have and generate good returns with the equity that we have in the ships.

Do you feel that the oil companies have to take the lead there and the prudent way would be to build against time charters?

Yeah, I think you've seen that Shell and Total and some others have gone out and looked to secure LNG propulsion tankers based against time shutters. So I think that obviously gives ship owners the confidence to invest in a technology, but I think there's still a risk. And I Other ship owners who have invested in that realize that the technology in future fuels is being developed at a far more rapid pace today than it was even 12 months ago. So diving in purely on LNG propulsion may not be the only answer. I don't think it will be necessarily the wrong answer, but it might be the only answer that's available. And there may be cheaper more efficient alternatives that come along. So I think, you know, the oil companies will drive the change into new technologies. But I think as we sit here today, we're confident that they'll also still need fuel-burning, good, solid, well-maintained quality Afromax and Suezmax as run by good companies.

And I mean, I don't know, are you looking at any potential, you know, new designs or what's the delivery timeframe right now if you were to order, you know, Suezmax vessel or Afromax vessel?

I think if you're a Christian, you'd probably give you more detail, but I think at this point in time, if you're looking for a quality yard in South Korea or China, you're looking at 2024 sort of second half delivery. There may be slots available in 23, but they're at sort of second tier yards.

Okay, great. That's it from me. Thanks.

Thanks, Magnus.

It appears there are no further questions at this time. I would pass the call back to the company for any additional or closing remarks.

Thank you for joining us today. We hope that you and your families remain safe and we look forward to speaking with you next quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.