Teekay Tankers Ltd.

Welcome to TKTankers Limited Second Quarter 2022 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 will find a copy of the second quarter 2022 earnings presentation. 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 could cause actual results to materially differ from those in the forward-looking statements is contained in the second quarter 2022 earnings release and earnings presentation available on our website. We'll now turn the call over to Stuart Andrade, TK Tanker's CFO, to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for TK Tanker's second quarter 2022 earnings conference call. Joining me on the call today are Christian Waldegrave, our director of research, and Mikkel Seidlin, director of chartering and freight trading. Kevin is attending to a personal matter at the moment, but sends his best. For today, I'll be leading the call. Moving to our recent highlights on slide three of the presentation, TK Tankers generated total adjusted EBITDA of approximately $58 million in the second quarter of 2022, an increase of approximately $41 million from the first quarter of 2022. We reported an adjusted net income of nearly $26 million or $0.76 per share during the second quarter, an improvement from an adjusted net loss of $14 million or $0.41 per share in the prior quarter. Our improved results quarter over quarter were primarily due to higher spot tanker rates. In the improving tanker market environment, which I will address shortly, TK Tankers is benefiting from our high operating leverage with 49 vessels currently trading in the spot market. This is enabling us to strengthen our balance sheet after weathering almost two years of a weak tanker market. Both our liquidity and our balance sheet leverage are moving in the right direction, and that remains a key focus for us. Oil supply chain disruptions related to Russia's invasion of Ukraine are proving to be durable, with new oil supply chains now established and marked by significantly longer average voyages, particularly for mid-sized tankers. Volatility in the market has been pronounced and continuous, driving average rates higher. With 98% of our fleet trading in the spot market, we are well positioned to maximize results in this strengthening tanker market environment. At the same time, it is important to underscore that the current situation is not just a story about Russia and Ukraine or about the immediate term. The outlook for mid-sized tankers is positive through at least the medium term based upon robust underlying supply and demand fundamentals. Finally, I would point out that we entered into an agreement to sell a 2005-built AfriMax in July for approximately $25 million, reflecting the recent appreciation in asset values and allowing us to crystallize an $8 million gain. We have also in-chartered an AfriMax for $23,000 per day for two years, allowing us to maintain our exposure to the spot market. Turning to slide four, we look at recent developments in the spot tanker market. As shown by the chart, spot tanker rate volatility has increased since March with rates in the second quarter of 2022 averaging significantly higher both quarter on quarter and year on year. Encouragingly, the troughs in the tanker rates over the past few months have generally been higher than the peak seen in 2021, which indicates that the market has turned a corner and that mid-sized tanker fleet utilization is reaching levels not seen on a sustained basis since mid-2020. The increase in spot tanker rates since February has been due to a combination of limited fleet growth and longer voyage distances in the mid-sized sectors due to changing trade patterns. This strength has continued into the early part of Q3 as the impact on ton mile demand following Russia's invasion of Ukraine appears to be durable. I will talk about this in more detail later in the presentation. Turning to slide five, we provide a summary of our spot rates in the third quarter to date. In the third quarter, based on approximately 43% and 37% of spot revenue days booked, TK Tanker's third quarter to date SuezMax and AfriMax bookings have averaged approximately $29,600 per day and $35,600 per day respectively. For our LR2 fleet, based on approximately 37% of spot revenue days booked, third quarter to date bookings have averaged approximately $35,400 per day. The third quarter is often weaker due to seasonal factors, but thus far this quarter, the market has remained strong across our core vessel classes. To put this in context, while rates achieved in the quarter to date have meaningfully improved compared to a good second quarter, they are actually three to five times higher than the rates in the third quarter of 2021. Turning to slide six, we look at tanker ton mile demand improvements since the start of the year. Tanker trade patterns have changed significantly since the start of 2022, benefiting both Afromax and Suezmax tankers. Short-haul exports of Russian crude oil to Europe have fallen by around 700,000 barrels per day compared to pre-invasion levels, with Russian crude oil increasingly being diverted to destinations east of Suez, particularly to India and China, which is increasing mid-sized tanker ton-mile demand. In order to fulfill its crude oil requirements, Europe is having to replace short haul Russian barrels with imports from other regions, most notably from the US Gulf, Latin America, West Africa and the Middle East. These changes are primarily benefiting Afromax and Suezmax tankers due to the load and discharge regions involved. These trade pattern changes are likely to be long lasting, with the EU planning to phase out all Russian seaborne crude oil imports by the end of 2022. Simply put, when oil imported into Europe previously came five days from the Baltic and now comes approximately 20 days from the Middle East on a Suezmax or approximately 20 days from the U.S. Gulf on an Afromax, that is obviously helpful for ton-mile demand. Similarly, when China imports oil from the Baltic on Afromaxes, which we have seen recently, it is another example of increased ton-mile demand due to changing trade patterns. Turning to slide five, pardon me, turning to slide seven, we look at the positive tanker supply and demand fundamentals over the next two to three years, which we believe point toward a more sustained tanker market recovery. Strong tanker demand growth is projected in both 2022 and 2023 due to rising oil consumption as the world adapts to the COVID-19 pandemic and a corresponding increase in oil supply, which in 2023 is primarily expected to come from growth in non-OPEC volumes. This is further supplemented by rising voyage distances due to changing trade patterns as outlined in the previous slide. As per estimates from Clarkson's, mid-sized tanker demand is projected to grow by approximately 7% in 2022 and by a further 5% in 2023, which would far outstrip projected fleet growth of around 3% and 0% in the same years. Looking further ahead, the outlook for tanker fleet supply continues to be very positive, driven by historic low levels of tanker orders, a rapidly shrinking order book, and an aging global tanker fleet. Only 2.1 million deadweight tons of tanker orders were placed in the first half of 2022, which is the lowest total for a six-month period since at least 1996. Furthermore, most of this ordering has been for small tankers, with no VLCCs or Suezmax orders placed since June 2021 and only a small number of AfriMax orders placed. As a result, the order book as a percentage of the existing fleet has fallen to just 5.2%, which is a record low. We expect the level of new tanker orders will remain low in the near term due to high new building prices, a lack of yard space through the end of 2025 due to high levels of container ship and LNG carrier orders, and continuing uncertainty over vessel technology. With a diminished order book and an aging fleet, we expect zero tanker fleet growth in 2023 and negative tanker fleet growth in 2024 and 2025, as removals of older ships are expected to outweigh new deliveries into the global tanker fleet. Turning to slide eight, we highlight some of the company's key financial metrics. While the fundamentals of the tanker market have been improving for some time, the current strength in charter rates has been fairly recent, following almost a two-year COVID-driven market downturn. However, because of our high operating leverage, with 49 vessels currently trading in the spot market, we are already generating significant cash flow in this higher rate environment. As shown on the graph on the left, our fleet-wide free cash flow breakeven level, including dry docking and other capital expenditures, is less than $16,000 per day. With this breakeven and our significant operating leverage, at spot rates we booked in the second quarter and those we have booked in the third quarter to date, our annualized free cash flow generation is substantial. In fact, at Q3 to date levels, our free cash flow yield would be on the order of 31%. As mentioned in my earlier remarks, the company intends to use the increased cash flow to further reduce balance sheet leverage. We are already starting to make progress in that regard after two years of a weak market. Our focus is on getting our balance sheet to a very strong place that will support our business and our ability to be opportunistic throughout the tanker cycles. In the meantime, And notwithstanding some of the macro risks in the background and the volatility that we expect to persist, we are optimistic about the mid-sized tanker market in both the short term and in the coming years. Our mid-sized fleet, spot market exposure, and trading orientation puts us in a great position to do well in a strong market. With that, operator, we are now available to take questions.