Teekay Tankers Ltd.

Welcome to the TKTankers LTD's 3rd 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, 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'd like to turn the call over to the company. Please go ahead.

Before we begin, I'd like to direct all participants to our website at www.tktankers.com, where you'll find a copy of the third quarter 2021 earnings presentation. Kevin and Stuart will read 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 third quarter 2021 earnings release and presentation available on our website. I'll now turn the call over to Kevin McKay, TK Tanker's president CEO, to begin.

Thank you, Ryan. Hello, everyone. Thank you very much for joining us today. for TK Tankers third quarter 2021 earnings conference call. Joining me on the call today are Stuart Andrade, TK Tankers CFO, and Christian Waldegrave, Director of Research. Moving to our recent highlights on slide three of the presentation, TK Tankers had a negative adjusted EBITDA of $16 million during the third quarter, down from negative $7 million in the prior quarter. We also reported an adjusted net loss of $50 million, or $1.48 per share, during the third quarter, compared to $42 million, or $1.23 per share, last quarter. Our results are largely due to weak spot tanker rates and a heavy dry dock schedule during this quarter. Despite another challenging quarter, we continue to maintain a strong balance sheet with performance liquidity of $209 million, and a net debt capitalization of 39% at the end of the third quarter. In addition, we completed the refinancing of eight vessels with new lower-cost sale-leaseback financings, which lower our overall cost of capital. Stuart will elaborate on this later in the presentation. In the freight market, spot tanker rates sank to historic lows during the third quarter, with the weakest rates seen since the 1980s. However, rates have seen a modest improvement at the start of the fourth quarter due to a combination of higher trade volumes and positive short-term factors, with further potential upside over the winter months. Although the timing of a more significant market recovery remains uncertain due to COVID-19, we believe many key indicators continue to trend in a positive direction. which I will touch on in more detail later. Lastly, the company took advantage of relatively firm secondhand tanker prices by selling a 2003 built Afromax for approximately $12 million. Turning to slide four, we look at recent developments in the spot tanker market. As noted in my opening remarks, spot tanker rates sank to historic lows during the third quarter. This was primarily due to ongoing OPEC Plus supply cuts, as well as a series of unplanned outages in non-OPEC countries, which led to relatively low trade volumes during the quarter. Tanker demand was also negatively impacted by the Delta COVID-19 variant, particularly in Asia, where renewed lockdowns led to reduced mobility. This was further compounded by relatively weak Chinese crude oil imports, due to a combination of inventory drawdowns and reduced import quarters for independent refiners. Finally, an increase in crude oil price led to higher bunker fuel prices for our vessels, further weighing on vessel earnings during the quarter. Spot tanker rates have modestly improved at the start of the fourth quarter, as shown by the chart in the middle of the slide. This improvement has been spurred by an increase in trade volumes in recent weeks as OPEC Plus returns more supply to the market and as some of non-OPEC outages seen in Q3 start to ease. Looking ahead, the IEA projects an increase in global oil production of 2.7 million barrels per day between September and the end of the year due to the continued unwinding of OPEC Plus supply cuts as well as more supply from non-OPEC countries. This should lead to a further increase in crude oil exports and therefore tanker demand over the winter months. However, we should caution that although global oil trade is improving, it remains well below pre-COVID levels and more oil supply is needed if the market is to return to full health. Global oil demand is expected to improve during Q4 and could get a boost this winter from the global energy crunch which has led to record high natural gas and coal prices in some regions and is encouraging some power plants to switch to cheaper oil for power generation. As shown by the chart on the right side of the slide, the IEA expects fuel switching to add 0.5 million barrels per day to global oil demand in the coming months. Though a very cold winter could boost demand by up to a million barrels per day compared to the base case, due to additional heating requirements. This, coupled with normal seasonal factors, such as weather delays, are potential positive factors for spot tanker rates this winter. Turning to slide five, we provide a summary of our spot rates in the fourth quarter to date. Based on approximately 50% and 37% of spot revenue days booked, TK Tanker's fourth quarter to date Suezmax and AfriMax bookings have averaged approximately $11,600 per day and $10,300 per day respectively. For our LR2 fleet, based on approximately 35% of spot revenue days booked, fourth quarter date bookings have averaged approximately $10,200 per day, all of which are higher than the rates achieved in Q3. To optimize vessel utilization in anticipation of tanker market recovery, We have tactically brought forward four additional dry dockings into the fourth quarter. For more detail, please refer to the appendix slide summarizing our dry dock and off-hire schedule. Turning to slide six, I'll give an update on some of the key indicators we track, which we believe point towards a significant future tanker market recovery. One of the main reasons that tanker rates have been so weak in 2021 is that while all demand has recovered and now stands at less than 2 million barrels per day below pre-COVID levels, oil trade has remained relatively flat. Global oil production has trailed demand for most of the year due to OPEC plus supply cuts, resulting in a large drawdown in global oil inventories to levels well below the five-year average. The tanker market is linked to the oil inventory cycle and periods where we see large inventory drawdowns tend to contribute to weaker stock tanker rates as drawdowns essentially displace oil imports. This has been the case for virtually all of 2021 and helps explain why stock tanker rates have been at historic lows this year. Looking ahead to 2022, global oil demand is expected to rise by between 3 and 4 million barrels per day as the recovery from the COVID-19 pandemic continues. The world will therefore need significantly more oil in the coming months and years to meet rising demand and to replenish depleted oil inventories. With this in mind, the OPEC Plus group plans to unwind its remaining supply cuts by September 22, while non-OPEC countries are expected to add a further 2 million barrels per day. Together, this should lead to a significant increase in oil production next year. and more importantly for the tanker market, an increase in oil trade. Turning to fleet supply, the outlook continues to be very positive. New tanker ordering ground to a virtual halt in the third quarter, with just 0.8 million deadweight tons of orders placed, the lowest quarterly total since the second quarter of 2009. Elevated new building prices, which are currently the highest since 2009, are expected to limit further new build orders in the near term. Meanwhile, shipyard availability is becoming increasingly scarce, as record container ship ordering has filled shipyard capacity well into 2024. The third quarter of 2021 also saw an increase in tanker scrapping, with 4.7 million deadweight tons removed, the highest quarterly scrapping total since the second quarter of 2018. The combination of low tanker ordering and higher scrapping bodes well for limited future fleet growth, and we currently estimate approximately 2% fleet growth in both 2021 and 2022, before minimal fleet growth in 2023, where scrapping is expected to largely offset new vessel deliveries. In sum, the fundamentals continue to trend in the right direction and point towards a future market recovery. The exact timing of this recovery remains uncertain, however, and will continue to depend to a large extent on how the COVID-19 pandemic and the global economy evolve in the coming months. I'll now turn the call over to Stuart to cover the financial slide.

Thanks, Kevin. Turning to slide seven, we highlight the company's strong financial foundation. As a result of our focus on reducing debt and building financial strength during last year's market upswing, we have maintained a strong balance sheet. The company has a pro forma liquidity position of $209 million, which provides financial resilience in this weak freight market. Since May 2021, the company repurchased eight vessels that were under higher cost sale leaseback financings using existing liquidity. In May, two of these vessels were repurchased for $57 million, while the remaining six vessels were repurchased in September for $129 million. I am pleased to announce that we completed lower-cost sale-leaseback refinancings for all eight vessels in September and November. While our repurchases and refinancings decreased our quarter-over-quarter pro forma liquidity by approximately $30 million, we have materially reduced our overall cost of capital with estimated interest expense savings of approximately $11 million in the first 12 months alone. We also have a low financial leverage with net debt to capitalization of 39% and a manageable debt repayment profile with no significant maturities until 2024. With that, I will turn the call over to Kevin to conclude.

Thank you, Stuart. As I've said in past quarters, I would again like to thank 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. We continue to focus on the safety and well-being of our seafarers as we look forward to the continued transition to a more normalized world. With a strong financial position and high operating leverage, we believe that TK Tankers is well positioned to continue to weather the current market challenges and benefit from anticipated tanker market recovery. With that operator, we're now available to take questions.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. Our first question comes from John Chappell with Evercore ISI.

Thank you. Good morning or good afternoon. Kevin, just a big picture one, maybe simple, maybe complicated. Where to from here? So two years ago, you laid out this path in your investor day. A heck of a lot's changed in that period, but you've accomplished everything on the financial side as far as the film leasebacks are concerned and the balance sheet. And now here you are with probably the best balance sheet in the industry, but a bit of an older fleet on the precipice of what's hopefully a big recovery off, as you noted, the worst market since the 80s. Where's the focus for the next 12 months as it relates both to the operational leverage and the financial leverage?

Well, good question, John. I think the main focus right now is just keeping our eye on the ball as we look to what uncertainties COVID-19 puts in front of us, if any. It appears that on that front, we seem to be getting ahead with vaccines around the world. And hopefully that plays into what we see as an improving tanker market. So strategically, I think what we've done, as you said, over the last couple of years is really to strengthen vaccines. the company and get our organization a better place to get ready for the upturn. When it does come, it's really looking at maximizing our returns from the fleet that we have. We currently have 50 ships. We feel that's a comfortable size. The age profile is average with the rest of the industry. So as you've seen us report this quarter, we're selling some of the older units as they because we can get good pricing for them. So I think the focus right now is just making sure that we weather the rest of this storm that's in front of us and that we've been going through for the last two years, and then making sure that we can absolutely drive revenue going into a much stronger market. Beyond that, I think the eye is obviously on the challenges that the industry has faced. in terms of reducing emissions and development of new technologies. And as our older fleet starts to sell off, we'll have to look at some of that new technology and make some decisions with regards to fleet renewal. But I think that's further down the road. At the moment, it's more focused on the next year or two years of maximizing our revenue generation and building an even stronger organization.

That makes sense. And then finally, just to be fair, I've asked all the other tanker companies this week the same question. You've laid out all these different inflection points for you. It was on page six of the slide deck that's just really compelling on how we're so much closer, hopefully, to the recovery. But what can go wrong? I mean, if we just take new variants and the pandemic out of the mix, even though we're not necessarily completely through that, Where else can maybe something kind of come up and trip a recovery before it really gets underway?

Well, let's take a simple one. On the fleet supply side, I don't see anything in the forecast that could trip up a recovery. The shipyards are full. The container ordering seems to continue unabated. There's LNG ordering to come. I can't see, certainly in the next couple of years, where fleet supply will be a challenge. It really comes down to what's lining up on the oil side. As we look at all the different variables that play into a market and that make trying to judge when this recovery really starts to take off in earnest, there's nothing in our line of sight other than reduced overall demand that could drive a scenario that isn't positive for our industry. I think calling the actual inflection point is futile because nobody really knows when this thing is going to turn. But as we've pointed out in our slides, all of the elements that we keep an eye on and more beyond that are all pointing to a much more positive environment for us going forward.

Okay. Appreciate your insights. Thank you, Kevin. Thanks, Sean.

Thank you. Our next question comes from Randy Givens with Jefferies.

Howdy, gentlemen. How's it going? Good, thanks, Randy. How about you? Great, great. On the last call, we mentioned that you were starting to clean up a few of your dirty LR2 kind of aftermaths to go back to the clean products trade. Any kind of updated thoughts or commentary around that? Are you getting more bullish on the product side of the equation, or do you still think kind of crude leads here from these levels?

Yeah, we did actually. We followed on over the summer period, and in total we converted four ships in the fleet to trade in clean cargoes, which has had positive results. I think going forward, though, the anticipated recovery in the product side to sort of lead the crude side hasn't really materialized. And if you look at sort of the Afromax LR2 returns on balance today, I think we're uncertain whether the LR2s will continue to be the place to trade in. So we've actually got a couple of ships that are coming open in the next few weeks, and the determination at the moment is probably to turn those back into crude trade. But I've said this many times on calls before, that's the beauty of the LR2. We can clean them up, and if we don't like what we see going forward, we can turn them quite easily back into the crude side.

Sure. That's fair. And then kind of a follow-up question on the balance sheet. You know, we're still in the high 30s, let's call it, net debt to cap. Have you kind of announced or do you have any kind of real goal targets there on leverage ratios before you make a, I don't know, strategic shift in capital allocation? or is it just all kind of market sentiment and timing?

No, we don't have a fixed number that we're aiming to get to. I think a lot comes down to what we see as lying ahead for us as a company, both in terms of our market as well as the profile of our fleet and what we're doing. But also, we've said this many times that we're in the tanker market and the tanker industry is a very cyclical business. So the stronger we can build our balance sheet and the lower the debt level that we can carry, that provides us financial flexibility that allow us to make the right decisions at the right points in the cycle. So I think going forward, I don't see us changing that strategy or that approach to how we run the the company or our balance sheet.

Okay, that's fair. So nice to see some progress there on the quartered state rates. So hopefully that continues. Thank you.

Thanks, Randy.

Thank you. Our next question comes from Magnus Feier with H.C. Wainwright.

Yeah, good afternoon, or I guess it's morning on the West Coast still. Kevin, maybe this is a question for Stuart, but You guided, I mean, OpEx, you did a great job on OpEx in the quarter, came in significantly below your guidance. I think you guided 44 million, came in at 39, and going forward, you're guiding for 40 million. Can you tell us a little bit about what's going on there and if that's a good run rate for 2022?

Sure, I can take that one. So in Q4, we had a little bit less expense related to some of our crew changes than we were expecting, so that helped reduce our OPEX. And we also tend to do a lot of bulk purchasing at the beginning of the year to try and get volume purchases to reduce our OPEX. And that bulk purchasing program was actually even a little more positive than we had expected, which reduced our spend in Q4 as well. So overall, we were, as you said, we had a good quarter for OPEX. In terms of our Q4 guidance, as you said, we've got it around 40 for Q4. And I think for a run rate, probably about 41 is a reasonable run rate. As I said, we tend to have a little bit higher OPEX at the beginning of the year as we do bulk purchasing.

Okay. So I guess we were running, you know, higher through most of the earlier in the year or so. What kind of costs, besides buying some of these supplies early in the year, is there anything else there that contributes to the lower run rate? Because that's a lot lower than the previous run rate.

Yeah, I think the two main factors there, as I said, is the bulk purchasing program. And then also some of the expenses related to COVID and crew changes and some of those things that we were taking on earlier in the year and that were a little more expensive earlier in the year. And those costs have come down through the year.

Okay, thank you for answering my questions.

Yeah, you're welcome.

Thank you. Our next question comes from Ken Hector with Bank of America.

Hey, great. Good morning. Kevin, can you talk a little bit about trends historically on the drawdowns? You mentioned the drawdown of inventory. So is there historically a level where you see the market say, okay, that's as low as we want to go and start to build the stocks up again? Is there kind of any inflection points you can point to historically?

Well, I think a year ago, I probably would have told you, Ken, that if we get down to the five-year average, historically or slightly below the five-year average, you typically start to see oil producers open the taps a little bit. But as we stand here today, we're 215 or 220 million barrels below the five-year average, which is almost the same as what we were above it. In the second half of 2020, we were 250 million barrels above the average. So we have come down a massive amount. We might learn something later today when the OPIT meeting adjourns, but so far it appears that the appetite is to release barrels into the market at a slow and steady pace rather than to open up fully. I don't think there's a number, there's certainly not a number that we at TNK look at and say, okay, when we hit this number of inventory level, things are going to change. I think it's just one more factor in the whole mix of variables that come into how our market operates. But I think we're optimistic. It can't go much lower. Christian, you might be more accurate on this, but I think we're something like getting close to 60 days of reserve supply. I mean, historically, when you get down to those levels, two things happen. One, oil price goes up, and two, eventually they turn the taps back on more significantly. Christian, anything to add?

No, no, I was just going to echo that point. We're at about 62 days of forward cover at the moment in the OECD, and like Kevin said, once you get below 60, that tends to be the point at which you get a bit of an oil price spike. So with inventory still drawing in the short term here, I think we could expect the situation to stay pretty tight and inventories to come down a bit further. But as OPEC keeps releasing oil onto the market at the pace that it's doing, plus some non-OPEC plus supply coming back, hopefully we'll start to look a little bit better as we get into 2022 on the oil supply front. And that should then help to start replenish those inventories. And that'll obviously be positive for the tanker market.

Mark? I guess that's not too encouraging if we're going to be driving in the near term. Kevin, I guess if you're looking at rates that are rebounding, is there thoughts now of maybe adding more charter-in vessels, or you mentioned I'm comfortable with the 50 vessels before. Would you take any moves now to position yourself even more for that inflection, or just given the unknown, it's not worth setting it up?

No, I think we've got different levers, and the in-charter portfolio has been a very good lever for us historically, going into what we think is going to be a strengthening market. Although we say we're comfortable with the 50 ships that we have today, we say that because asset prices are at 10-year highs, and we don't feel that there's value there to be a purchaser of ships, but On the in-charter side, we've done this three in-charters already earlier in the summer. And we said after we did those, we would take a pause and we would look at where we see the economy going, the recovery coming, and what COVID had to offer. And I'm glad we did because I think the market's softened or stabilized. I would say not softened, but more stabilized. So I think we've got an opportunity to go back in and add to that portfolio of three ships. So I think as the green shoots appear, I think you'll probably see us go back in and try and get some ships on a short-term to mid-term basis, anywhere from six months out to three years, something like that. All depends on the ship and at the rate that we can bring it in at, if there's value to be had.

So maybe something we see more activity depending on where rates go. Yep. Looking at your chart on page four, it just looks like we're maybe a little delayed in this seasonal rebound from that. I guess typically it starts a little bit more end of October. I thought it was more Thanksgiving that you started to see that ramp up. Is that something you, any reason to not see that seasonal strength given the environment you set up for the, you know, as we move to the end of the year here?

Well, I think, you know, every year we say that the fourth quarter is a stronger quarter. Some, some years I've seen it kick off right at the beginning of, you know, end of September going into October and some years I've seen it happen, you know, in the first week of December. So I don't think there's a, specific week or a specific month where you'd expect things to take off. And I think, you know, what we've seen already is that in October things picked up and that strength seems to have continued in November. Where it goes from here, I think, you know, it will be a stronger quarter definitely compared with Q3, but Will it return to sort of levels we saw in the early part of 2020? No, I don't think we're going to get to those kind of highs. Not when we have 4.7 million barrels of crude still not being transported around the world. But I think it will still be a healthy quarter. And we may see further improvement as weather delays and another seasonal crisis limitations on the logistics chain come into play. So there's certainly what we're seeing across the Afromax segment and the Suezmax segment to a lesser degree is we're getting more pockets of volatility. In the summer, it was more, you know, you had Hurricane Ida and that affected the U.S. Gulf and everywhere else was a little bit flat. Whereas now we're seeing the Med pick up a little bit. We're seeing some volatility in the North Sea. North Asia is starting to tighten. So to us, it's indicating that things are starting to tighten up, not massively or overly tightening, but it's certainly more tight than it was during what I'd call the trough in the summer. But I wouldn't sit here today and try and predict exactly how high it's going to go.

Great. Kevin Stewart, appreciate the time. Thanks.

Thanks, Ken. Thank you. This concludes our question and answer session. I would like to now turn it back to the company for any closing remarks.

Thank you for joining us today, and thank you for your support in TNK. Talk to you next quarter. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.