Teekay Tankers Ltd.

Welcome to the TK Group Third Quarter 2024 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.tk.com, where you'll find a copy of the TK Group's third quarter 2024 earnings presentation. Kenneth 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 TK Corporation and TK Tankers third quarter 2024 earnings releases and the TK Group's earnings presentation available on our website. I will now turn the call over to Kenneth Fitt, TK Corporation, and TK Tanker's president and CEO to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for the TK Group's third quarter 2024 earnings conference call. With the recent management changes, this earnings call will cover both TK Corporation and TK Tanker's earnings for the quarter. Joining me on the call today for the Q&A session is Brody Spears. TK Corporations and TK Tango's CFO, Ryan Hamilton, our VP Finance and Corporate Development, and Christian Waldegrave, our Director of Research. Starting on slide three of the presentation, over the past few years, the TK Group has taken several important steps to streamline the organization. Notably, this includes the recent simplification of our group management and decision-making structure. and T&K's planned acquisition of our TK Australia business, which we will cover in more detail later in the presentation, as well as TK Corporation's transfer of all of its remaining management service companies to T&K, which consists mainly of our shore-based staff. The result of these steps is a new structure that looks similar to historical TK, where TK Tankers is positioned as the fully integrated sole operating platform for the TK Group, and TK Corp as the strong, supportive sponsor. Throughout this streamlining process, we have focused the group on tankers while systematically reducing a significant debt load. I'm very proud to say that following a multi-year effort, TK Group today has one of the strongest balance sheets in the industry with no debt and considerable cash positions, which we believe is important in a cyclical industry as a strong balance sheet allows us to act counter-cyclically at the right times in the cycle. T&K will remain committed to disciplined fleet and reinvestment while T&K will focus on managing its controlling interest in T&K and can provide financial support if necessary. On slide four, we will cover the recent developments at the T&K Corp level. As mentioned, T&K has agreed to sell T&K Australia and also transfer its remaining management services companies to T&K to streamline and simplify the group. T&K will acquire TK Australia for $65 million in cash and transfer the management services companies for their net working capital value. When we closed the sale of TK LNG back in early 2022, the group had approximately $300 million in capital available at the TK level, with T&K still waiting for the Tanger market to turn and burdened with a significant debt position relative to the feed profile. Fast forward to today, While TNK has a fleet that will require some renewal, it has one of the strongest balance sheets in the industry. And therefore, we do not feel the need to hold as much cash at the TK Corp level as we have over the past two and a half years. As a result, the company is allocating up to $230 million of its cash back into the business and in part as a return of capital to shareholders. This includes returning $144 million of capital to a shareholder since early August, or over 20% of its current market cap, consisting of $59 million of TK share buybacks at an average price of $8.56 per share and a $1 per share special cash dividend to TK Corp shareholders for a total dividend of approximately $85 million, payable in December. In addition, our board of directors has also authorized a new $40 million share buyback plan. Lastly, T&K also purchased $50 million of T&K Class A common shares at an average price of just under $59 per share, increasing our economic and voting interest in T&K to 31% and 55% respectively. We believe that T&K is well positioned to continue to generate significant free cash flow and build equity value. This increases the underlying value of both T&K and TK Corp through its controlling ownership of T&K. And therefore, we believe both the T&K share purchases and the TK Corp share buybacks represent good values. As a result of our simplification efforts and flexible capital allocation, we plan to continue to deliver shareholder value and hope to illuminate the underlying value in both companies. Moving to slide five, we will cover the highlights at the TK Tangers level. TNK's third quarter earnings and free cash flow remain strong, with spot rates in the low to mid $30,000 per day. Adjusted net income was $63.5 million, or $1.84 per share, and our adjusted EBITDA was nearly $76 million. It is important to note that we strategically planned the dry docking of 10 of our vessels during what is typically the weakest quarter of the year to ensure that our fleet was fully available for the anticipated winter tanker market uplift. On T&K's acquisition of TK Australia, T&K is acquiring a business with an estimated annual EBITDA of $10 million, consisting primarily of stable, longer-term government service contracts at an attractive valuation. We like the stability of this government business and believe in its future prospects. I will cover this business in more detail on the next slide. With all the group's operations under T&K, it was a logical step to transfer all the remaining management services companies not otherwise owned, which is mainly our short-based staff to T&K. Looking to what we have booked so far for the fourth quarter, it is closely in line with where we stood at this point last year. As you can see from the bar chart on the lower right on the slide, Importantly, as you can see from the red dots above these bars, the latest Clarkson's reported spot rates in the market today have moved higher as we transition into the typically stronger winter season. We'll cover the tanker market in more detail later in the presentation. Lastly, TK Tankers has once again declared its quarterly fixed dividend of 25 cents per share payable in November. Moving to slide six. I will briefly cover the TK Australia business that TK has been operating for nearly 30 years. This is an asset-light and capex-light services business that carries out comprehensive vessel management, procurement, and staffing primarily for the Australian government on 11 vessels with total revenues in excess of $100 million and an average annual EBITDA of approximately $10 million. TK Australia's value add is its approach to the business with a ship owner's mindset. We are one of the largest employers of Australian seafarers and have strong government and industry relations that have been established over nearly 30 years. Leveraging TK's industry expertise, TK Australia has secured stable, long-term contracts in a niche market. While this accretive investment for T&K is small relative to our core tanker business, we like the asset-light model first-class customer base, and stability of cash flows. We also believe there are growth opportunities in this business over time, and we're in a great position to pursue these opportunities as they arise. Turning to slide seven, we look at the near-term outlook for the tanker market. Spot tanker rates remained historically firm in Q3 and were amongst the highest for a third quarter in T&K's history. As is typical for a third quarter, rates showed a seasonal downturn compared to second quarter due to a combination of lower crude oil export volumes from various major oil producers, the onset of seasonal refinery maintenance, and relatively weak Chinese crude oil imports. However, as can be seen by the chart on the bottom right, spot rates are firming at the start of Q4 in line with normal seasonality, with the shape of the curve so far looking very similar to 2023. We expect spot tango rates to remain relatively firm through the winter, though it's too early to say whether they will match the strong rates seen in Q4 of last year. We believe tango rates will be supported by a seasonally stronger oil demand and, more importantly, an increase in crude oil export volumes from key producers. The reduction in Libyan Crude oil exports seen in September due to a dispute between the two regional governments also appears to be in the process of normalizing, which is adding support to tanker demand in the Mediterranean. Normal winter market factors, such as weather delays, are expected to give further support to rates by tightening available vessel supply as is normal during the fourth and first quarters of the year. Finally, The potential for higher OPEC plus supply should they decide to proceed with the unwinding of 2.2 million barrels per day of voluntary supply cuts and a possible boost to Chinese crude oil imports due to recent government stimulus could also support rates during Q4. Turning to slide eight, we look at tanker demand and supply factors, which we believe point towards continued tanker market strength over the medium term. Global oil consumption, which is already at an all-time high, is expected to grow further with projected growth of 1.3 million barrels per day in 2025, as per the average forecast from three major energy agencies. The majority of this growth is expected to come from Asia, particularly from India, which is the second largest importer of oil in the world after China. But importantly, it is expected to be the global leader of oil demand growth going forward. Global oil supply is also at an all-time high and is set to grow further due to increasing production in non-OPEC-plus countries. As per the IEA, non-OPEC-plus supply is projected to grow by 1.5 million barrels per day in 2025, led by Atlantic Basin producers such as the United States, Brazil and Guyana. Given that the bulk of oil supply growth is in the Atlantic, but demand growth is concentrated in Asia, We expect that the long haul movement of crude oil from west to east will be a key driver of tanker ton mile demand in the medium term. We should also mention that in addition to positive underlying oil market fundamentals, the tanker market continues to be shaped by geopolitical events. This is particularly evident in the Middle East, where ongoing attacks on shipping in the Red Sea region are causing tankers, particularly in product tanker sector, to divert around the Cape of Good Hope thereby adding to voyage distances and boosting tanker ton mile demand. Recent events in the Middle East have the potential to further destabilize the region, which could impact oil production and shipping should they escalate further. The full effects of any such disruption are uncertain, but they have the potential to further add to tanker market volatility in the coming quarters. Hurting to fleet supply. New tanker deliveries are set to increase in 2025 and 2026 due to orders placed over the past 18 to 24 months. However, at around 13% of the existing fleet, the global order book is still below the long-term average of 20%. Furthermore, forward order book cover at the major shipyards currently stretches three years or more with a lack of available shipyard capacity until the second half of 2027. In addition, the fleet continues to age, with the average age of the Tanger fleet currently the highest since 2002. As can be seen by the chart on the bottom right, the number of vessels on order is still relatively small compared to future fleet replacement demand. The combination of a modest order book, a lack of shipyard capacity, and an aging fleet should ensure that tanker fleet growth remains at relatively low levels over the next two to three years. While the pace of tanker scrapping remains very low, the past two years have seen a steady flow of vessels from the conventional fleet to the so-called shadow fleet of tankers servicing sanctioned trades, the majority of which are older vessels, which would otherwise be approaching end of life. This shadow fleet now counts several hundred vessels, which generally operate at much lower utilization levels compared to the conventional fleet. While the future of this shadow fleet is uncertain, particularly in light of increased scrutiny and sanctions from both the US and Europe, the migration of ships from the conventional fleet to the shadow fleet adds an extra layer to tanker market volatility. In sum, we believe that tanker demand and supply fundamentals continue to look positive, which should lead to ongoing strength in the tanker market over the medium term. Turning to slide nine, we highlight how the TK tanker's fleet profile is ideally situated to maximize value in the current market. As mentioned at the beginning of this call, we have spent considerable effort and resources over the several years to eliminate our outstanding debt, This, in turn, has enabled us to bring our free cash flow breakeven down dramatically to approximately $14,000 per day, which I want to highlight is a really extraordinary level for midsize tankers and amongst the lowest in our peer group. With the fleet's low breakeven, high utilization for midsize tankers, and the near total exposure to the spot market, we're able to generate significant free cash flows, which over the last 12 months has totaled approximately $13.29 per share. Moreover, for every $5,000 increase in spot rates above our breakeven level, our annual free cash flow yield increases 4.8% or generates approximately $2.30 in free cash flow per share. In summary, The TK Group is streamlined and fully oriented around the TK Tankers operating platform, with TK Corp focusing on managing its controlling interest in TK Tankers. We are optimistic about the market dynamics ahead of us, and as we continue to generate earnings and maintain our discipline and long-term orientation in deploying or retaining that capital, we look forward to continuing to build shareholder value at both TNK and TK Corporation. With that, operator, we're now available to take questions.