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spk00: 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.
spk02: 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 third quarter 2022 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 could cause actual results to materially differ from those in the forward-looking statements is contained in the third quarter 2022 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.
spk07: Thank you, Ed.
spk08: Hello, everyone, and thank you very much for joining us today for TKTanker's third quarter 2022 earnings conference call. Joining me on the call today are Stuart Andrade, TKTanker's CFO, and Christian Waldegrave, our Director of Research. Moving to our recent highlights on slide three of the presentation, TKTanker's generated total adjusted EBITDA of approximately $92 million in the third quarter of 2022. an increase of over $33 million, or 57% from the second quarter of this year. We reported an adjusted net income of nearly $58 million, or $1.70 per share during the third quarter, an improvement from nearly $26 million, or $0.76 per share in the prior quarter. Our improved results quarter over quarter were primarily due to higher spot tanker rates. In a counter-seasonally strong market, we benefited from having 98% of our fleet in the spot market, which in turn enabled us to reduce our net debt capitalization to 35% at the end of the quarter and to increase our liquidity to more than $250 million. The strong charter market for mid-sized tankers is being driven by both tanker market fundamentals and geopolitical factors. Mid-sized tanker voyages have materially lengthened as a result of the conflict in Ukraine, driving up charter rates that are expected to stay strong throughout the winter months. At the same time, the continued absence of new tanker orders means that we expect to see minimal or even negative fleet supply growth through 2025. Turning to slide four, we look at recent developments in the spot tanker market. Spot tanker rates continue to firm during the third quarter. counter to normal seasonal trends. Average mid-sized spot tanker rates were the highest for a third quarter since 2008, as shown by the chart on the left. The strength in rates was primarily due to a combination of a continued rerouting of Russian oil exports from Europe to Asia, which has created significant ton mile demand in the mid-sized segments, as well as Europe repricing Russian barrels with imports from more distant sources, including the U.S. Gulf, Latin America, West Africa, and the Middle East. I will give more detail on Russian trade flows and their impact on mid-sized tanker demand later in the presentation. Turning to slide five, we provide a summary of our spot rates in the fourth quarter to date. Fourth quarter to date rates have improved as we moved into a seasonally stronger quarter. Based on approximately 43% and 38% of spot revenue days booked, TK Tanker's fourth quarter to date Suezmax and Afromax bookings have averaged approximately $40,000 per day and $36,600 per day respectively. For our LR2 fleet, based on approximately 36% of spot revenue days booked, fourth quarter to date bookings have averaged approximately $44,700 per day. Overall, these rates were approximately three times higher than last year's fourth quarter spot rates. Turning to slide six, we provide our expectations for the upcoming winter market. As outlined previously, the reshaping of oil trade flows following Russia's invasion of Ukraine has increased mid-sized spot tanker rates year to date. However, the rerouting of Russian crude oil away from Europe is only partially complete. As shown by the chart on the top left, European seaborne imports of Russian crude oil have fallen just over 2.5 million barrels a day at the start of the year to around 1.5 million barrels per day by September. However, from December 5th, these volumes are set to fall to zero as the EU ban on Russian crude oil imports by sea comes into effect. Thus far, these volumes have been replaced almost barrel for barrel by imports from the U.S. Gulf, Latin America, West Africa, and the Middle East, as shown by the chart on the top right. As Europe continues to reduce its imports of short-haul Russian crew, they'll need to source additional replacement barrels, which will come from much further away in terms of sailing time. As an example, a voyage from the Russian port of Primorsk in the Baltic Sea to Rotterdam in northwest Europe is approximately four days in duration. In comparison, a voyage from Houston to Rotterdam is approximately 17 days in duration. Europe's replacement of Russian barrels from other sources is therefore creating significantly longer voyages, thus more ton-mile demand, and this is set to increase further once the full EU ban comes into effect. At the same time, Russia is having to find new customers for the oil that is no longer being sold into Europe. As shown by the chart on the bottom left, most of this oil has been flowing to Asia, in particular to India. Again, this is significantly increasing ton-mile demand due to the distances involved, with the distance from Primorsk to the west coast of India being almost 7,500 nautical miles, or 26 days. Looking ahead, we expect that Russia will look to divert more barrels into Asia once the EU ban comes into full effect. China could look increasingly to Russian imports as their import requirements grow, and the Chinese government recently issued 15 million tons of new export quarters to their refineries for Q4 2022, as well as the first batch of crude import quarters for 2023. The net impact of these trade flows is displayed on the chart on the bottom right. It shows the change in ton miles in January 2022 compared to September 2022 on these three trade routes. As shown, the loss in ton miles from Russian exports to Europe has been dwarfed by the combined positive ton mile impact of increased Russian exports to Asia and by Europe's replacement of Russian barrels from more distant sources. This trend is set to continue in the coming months, which we believe will further drive midsize tanker ton mile demand. While the redrawing of global trade patterns is the largest single factor behind the current strength in rates, there are other reasons to be optimistic about tanker rates in the coming months. Global oil demand is being boosted this winter by increased gas to oil switching, particularly in Europe, due to the high cost of natural gas. In addition, we expect normal seasonal factors, such as weather delays, to add to further volatility. Partially offsetting these positive factors is the recent announcement from OPEC Plus of a 2 million barrel per day supply cut starting from November. Many OPEC Plus countries, however, are already struggling to meet production targets, which means the actual cuts will likely be closer to 1 million barrels per day, most of which will come from the Middle East. This is expected to primarily impact the VLCC sector rather than mid-sized tankers, and therefore we do not see this as a significant negative factor for Afromax and Suismax spot rates through the winter months. Turning to slide seven, we look at positive tanker supply and demand fundamentals over the next two to three years, which we believe point towards the potential for sustained tanker market strength. Fleet supply fundamentals out 2025 continue to look very positive as a lack of new tanker ordering is leading to a rapidly shrinking order book. As shown by the chart on the left, 2022 is on track for the lowest level of new tanker orders in 35 years, with a projection of around 6 million deadweight tons at the current pace of ordering. This is highly unusual given the relatively strong spot tanker market in recent months. as periods of stronger freight rates have in the past tended to result in an increase in new tanker orders. However, very high new building prices, a lack of shipyard capacity through the end of 2025 due to high levels of container ship and LNG carrier orders, and uncertainty over vessel technology have deterred owners from ordering new tankers during the current upturn. As a result, the order book, when measured as a percentage of the existing fleet, has fallen to a record low of just over 4% as of October of this year. Coupled with an aging tanker fleet, we expect low fleet growth in 2023 and potentially negative fleet growth in 2024 and 2025. Turning to the outlook for tanker demand, a potential slowing of the global economy due to inflationary pressures and rising interest rates means that the outlook for 2023 has become more uncertain. However, the major oil agencies are still forecasting a relatively robust oil demand growth next year due to continued gas to oil switching and an expected post-COVID rebound in Asian oil demand, particularly in China. Global oil demand is expected to grow by 1.8 million barrels per day in 2023, as per the average of forecasts from the IEA, EIA, and OPEC, which would return demand to pre-COVID levels. More importantly, the continued redistribution of Russian oil exports, as outlined earlier in the presentation, would drive average voyage distances higher and spur increased ton-mile demand. As per Clarkson's, tanker ton-mile demand is expected to grow by over 6% in 2023, and around 5.5% in 2024, far outstripping fleet supply growth of just under 1% and negative 1%, respectively, which should help tanker freight rates remain firm, albeit volatile, over the next year and beyond. I'll now turn the call over to Stuart to cover the financial slide.
spk04: Thanks, Kevin. Turning to slide eight, we highlight the company's capacity for creating significant shareholder value. Given our 49 vessel fleet and with almost all vessels trading in the spot market, TK Tankers continues to generate significant cash flow, benefiting our shareholders by building further financial strength and rapidly increasing equity value through the repayment of debt. As can be seen in the chart, our fleet-wide free cash flow breakeven level including dry docking and other capital expenditures, is approximately $15,000 per day. For every $5,000 per day increase in spot rates above this level, the company is expected to generate approximately $85 million or $2.50 per share in annual free cash flow. As we approach the seasonally stronger winter period, TK Tankers is poised to continue strengthening its financial position and creating shareholder value. As an illustration, at the current fourth quarter to date rates, we would expect to generate free cash flow of approximately $12.50 per share in the next year, which equates to a free cash flow yield of approximately 38%.
spk07: I will now turn the call back to Kevin to conclude. Thanks, Stuart.
spk08: In summary, with a very limited number of new builds set to join the global fleet between now and 2025, we see significant structural support for the current strong spot market, despite potential macroeconomic headwinds to oil demand. On top of that, the ton-mile impact of Europe turning away from Russian oil has proven to be sizable and appears to be long-lasting. And the forthcoming EU ban from early December is set to significantly increase that impact. Midsize tankers like those in the TNK fleet continue to be disproportionate beneficiaries of these supply chain shifts. By positioning our fleet to trade spot, we are very heavily exposed to the current tanker market strength, and our high operating leverage means that strong tanker market translates directly into TNK's free cash flow. We continue to focus on reducing our leverage in a manner that we think is prudent and that positions us well to be successful over the long term.
spk07: With that operator, we're now available to take questions.
spk00: Thank you. If you do wish to ask a question at this time, again, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, it is star 1 to ask a question. And we can now take our first question from Omer Nocta of Jefferies. Please go ahead.
spk06: Hey, guys. Thank you. Good morning. Kevin, you went through the 10-mile impact we've been seeing this year due to the evolving trade patterns as a result of the war. Your fleet obviously being focused exclusively on the Suez and Afras, it's been in the sweet spot of being the most in demand as a result of all this. I just wanted to ask, with the ban now coming into effect here starting in about a month's time, What have you seen so far as a response ahead of that? Are you seeing anything that's transpired differently here over the past few weeks? What are charters doing from your vantage point, perhaps differently, to prepare?
spk07: Hi, Omar.
spk08: Generally, we haven't seen a material impact up until now. I think given the the duration of voyages going into Europe, we probably won't see that for another, maybe another week, potentially another 10 days. We are seeing heavier volume coming out of the U.S. Gulf. And I think that's why, you know, you've seen U.S. Gulf rights on Afromax has jumped to over $90,000 a day because the disconnect between the number of ships available to move those cargoes. We're also seeing a growth in lightering imports and sorry, lettering exports to the U.S. Gulf and shipping onto VLCCs, some of which will be going to Rotterdam. So I think that's the early sign of this ramp up in imports destined for Europe. But beyond that, we haven't yet, I don't think, seen a broad reaction across all different traders yet.
spk06: Okay. So presumably in, I guess, the next few weeks, we'll start to see the, you know, the the impact of that. Thanks for that, Kevin.
spk08: It's also important to note that the U.S. has also just recently come out and given a bit of a stay of execution, if you will, acknowledging that there will be shipments that are done prior to the ban coming into effect that might not be able to complete before the December 5th ban, and they've extended those the allowance for those legal voyages to execute and deliver their barrels up until I think it's the 19th of January. So maybe that's potentially why we haven't seen the ramp up as early as maybe you're expecting.
spk06: Okay. Thanks for that. Very helpful. And then just maybe just to shift gears here a bit, obviously you guys over the past several years have been really focused on strengthening the balance sheets. building liquidity, and you've lowered the net debt to cap here into the low 30s. How do you think about – I mean, you get this question a lot, and I guess I have to ask it, but how do you think about your use of cash here for the rest of, say, this year? And does that shift at all as you get into 23 or deeper into 23? Any color you can give?
spk07: Yeah, I think –
spk08: Fundamentally, I think we've said this several times over the last few years. As management, we believe that we'll create more long-term value for shareholders by running the company from a position of real financial strength. We've just recently experienced a fairly brutal, almost two-year downturn in the tanker market, and we've only just started to come out of that in the last quarter or two. which has been great. We've gained ground over the last couple of quarters on the inroads we were making to reduce our financial leverage. And we're happy with the progress we're making so far. But our intention at this stage is to continue to really focus on paying down debt, as we've said on previous calls.
spk07: Okay. All right. That's clear. Thanks, Kevin. Thanks, Omar.
spk00: And we can now take our next question from John Chapelle of Evercore. Please go ahead.
spk03: Thank you. Good morning or good afternoon. Kevin, I'm going to ask that question a different way just based on some of the numbers. If I look at this slide that Stuart put out there with the 1250 of annualized free cash flow per share based on the fourth quarter to date numbers and layer that in with the slide that you presented that shows ton mile demand easily dwarfing fleet growth over the next couple of years. That $1,250 a share, based on your share count, would basically pay off your entire debt profile immediately. So maybe another way to ask it is, what do you need to see before you shift gears back to what TNK was when it was formed 15 years ago with a more direct capital return based on the earnings profile of the company?
spk07: Well, I think, you know, first off, it's about John.
spk08: having been through the last 15 years as a company, you obviously learn things. And one of the things we've learned as a management team is that in a tanker industry that is highly cyclical, it's prudent to arrive at the market from a position of strength. So the way we look at this, we want to further strengthen our balance sheet to really meet three goals. And I think Stuart articulated this on the last earnings call. Primarily, we want to avoid any type of financial distress for the company as we move through a variety of tanker cycles. And as you said, the way we're generating cash, if this market sustains at these levels, that box will be ticked fairly shortly here. But beyond that, we also want to have the capacity and the financial strength to act opportunistically when we see good deals that add value coming along. And that could be the ability to take on more in-charter exposure. It could be looking at different technology additions. It could be a variety of things, including ship purchases. And just to be able to act more opportunistically and with a sort of trader approach to use our financial strength. And then finally, it's more the structural strategic leg that we're trying to fill, and that is to have the financial strength to make material investments in our fleet as we move through the cycles. So yes, it's about paying down debt, but it's also about positioning the company financially to give us the ability to look at a variety of opportunities in the future that drive long-term shareholder value.
spk03: Okay. So let's follow up with that then with my follow-up on renewal in the fleet. By my count, roughly 75% of your fleet will be at least 13 years of age as the calendar flips to 23%. Asset values are ripping right now. How do you balance investing for the long term, given asset values that have kind of become parabolic versus modernizing a fleet that, as you've delivered, has aged a bit, probably more than you would have liked?
spk07: Well, I think, first of all, let me make it clear.
spk08: I think we're very happy with where our fleet stands today. uh today um we're happy with the size of the fleet we're happy with the exposure that we have we're happy with you know the market that we are anticipating um going ahead so we're in a position where we're comfortable um over the long term though um you know fleet renewal is definitely something that we will need to do and act on um but the acquisition timing and finding the right deals is really crucial to being a successful tanker company. So I think you've seen us already start the process. We've divested of several ships in that sort of 2003 to 2000 built era over the last 18 months as asset values have climbed. So selling off these older tonnages into this strong asset environment has begun. We're bringing in a modern new build in January next year on a long-term time charter basis at very attractive rates. So that's adding to some of the renewal. In terms of new building and second-hand values at the moment, both, we don't see attractive pricing at the moment. We don't think that doing something now would add long-term value. But As I said, we're comfortable. We don't feel that even with an average fleet age of 13, that it's something that we need to run out and do acquisitions for the sake of it, no matter what the terms are. So I think it's more around building that financial strength, building the balance sheet up so that when the opportunities do arise and we do see value returning to some of these markets, that we have the balance sheet to be able to act on it. So I think it will require a bit of patience and taking our moments.
spk07: Okay. Thanks for the thoughts as always, Kevin. Thanks, Sean.
spk00: We can now take our next question from Ken Hoekstra of Bank of America. Please go ahead.
spk05: Hey, great. Good morning, Kevin Stewart and Christian. Maybe talk a bit about the rates now in the 40s. You mentioned chartering in some vessels coming up. Is there a chance you move to charter out and lock in these rates, or do you still want to play? As you mentioned, it's only been a few quarters that you've entered this upswing. Do you kind of wait this out a little bit longer? Maybe talk a bit more about your philosophy there.
spk07: Hi, Kent.
spk08: I really don't think our philosophy changes in terms of out-chartering or indeed in-chartering. The numbers are obviously very different, but I think our approach to the idea of the charter portfolio doesn't change. So at the moment, as I said, we're extremely happy with the fact that 98% of our fleet is exposed to this market. We're not in a hurry. We think the winter market definitely has some more legs here. But we are looking at opportunities that are out there and evaluating them against what our forward view is. We haven't executed on anything as yet, but that doesn't imply that we're not turning over stones and having a look at what's out there. And I think looking at our fleet size of 50 ships and exposed to this market, we have the capacity to put away a few ships. And I think you'll probably see us do that at some point over the winter and into 2023 for various durations because it makes sense if you can lock in some attractive numbers at high levels, it saves you having to do that work in the stock market. So I think it's something that we've always looked at. It's something we continue to look at. And I think that doesn't just mean outcharging as well. I think you will probably also see us look at potentially bringing more ships in. If there's an ability for us to make a margin, you'll see us do that as well.
spk05: Yeah. So I guess as we went through this, you wanted to make sure you were exposed to the spot. Now you're saying as we go through the winter season, At these levels, maybe there is room. Is there a percentage you'd want to maybe limit that to? Is it 10%, 25% of the fleet that you'd want to be to keep that spot exposure, or is there no set thought there?
spk07: No, we don't look at it formulaically.
spk08: A lot of it adjusts week over week, month over month, as we see things developing in the market, be it geopolitical issues or economic fundamental issues around tanker rates. So it's not, we don't go into the year or into the winter with a fixed percentage in mind. And we really just evaluate individual deals on a case-by-case basis.
spk05: Thanks, Kevin. So let me ask a follow-up on the different subject back to the Russia. Maybe just talk about, you know, you talked about what's left here. Is there a point where, you know, You would start to get nervous of the unwind if there's peace or how long that would take. I guess I'm trying to understand how stable you think this new world order and environment can be at least, you know, is it at least the next year, two years? How long do you think the permanency of this setup as you get these longer ton miles kind of built into the network?
spk07: You're essentially asking me to read Putin's mind.
spk08: In any environment like this, obviously a war between two significant countries is obviously not something we deal with all the time. It's something that we have to, like all participants in any industry, we have to read and try and understand where this might be going, but we We can't project out that far. It's just too far out. What we can look at is the fundamentals that are underpinning our market. Those are very strong, as I've articulated in the presentation. For now, the ton-mile increase, we think, has been durable now for eight months. We think it will be durable definitely through the winter and possibly through the end of 2023. You never know. We can't guarantee that. So you always have to keep an eye on developments and see and react accordingly.
spk05: All right. Fair question to a tough answer to a tough question. Maybe just one more, if I can, just the order book, right? Is there, are you seeing any, I mean, given where rates are, you know, I get the structure. I understand how thin the order book is. Is there anything the yards are doing to create spots to, You know, are they looking at these rates and where they are and trying to open up spots? Or are you seeing any loosening of that? Or are your peers going to place some new orders in at this point? Maybe you could talk about if there's anything, you know, that could disrupt that part of the equation.
spk01: Yeah, hi, Ken. No, in terms of shipyard capacity opening up, we're not really seeing anything there. If you look at the order book, I think for 2024, it's pretty much set. There's no spare capacity at the yards. For 2025, there is still some capacity for, you know, second half of the year. Not so much at the big three Korean yards, but at some of the smaller, more medium-sized Korean yards and in China. But it's not enough capacity that could sort of swamp the 2025 order book and cause a material increase in tanker fleet growth. And on the owner's side, It's quite remarkable that given the charter rates we're seeing, we haven't had much tanker ordering at all. If you look at this year, we've only had about 5 million deadweight of tanker orders. Now you go back to 2015, which was a comparable year for tanker rates, we had 30 million deadweight of orders. So I think the kind of triple problem of high new building prices, not a lot of shipyard capacity, and questions still over vessel technology is deterring orders. So For now, we don't see much red flags with regards to that 2025 order, but we still think that it's going to be a very low year for tanker deliveries and possibly negative fleet growth again in 2025. Great. Thanks, Christian.
spk05: Thanks, Kevin and Stuart.
spk07: Appreciate the time. Thanks, Ken.
spk00: We have no further questions at this time. I would now like to hand the call back to the company for closing remarks.
spk07: Thank you for joining us today, and we look forward to speaking to you in three months' time. Goodbye.
spk00: This concludes today's call. Thank you for your participation. You may now disconnect.
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