Teekay Tankers Ltd.

Please stand by, we're about to begin. Welcome to the TK Group Fourth 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 touch-tone 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 fourth quarter and annual 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 fourth quarter and annual 2024 earnings releases and the TK Group earnings presentation available on our website. I will now turn the call over to Kenneth Vid, TK Corporations and TK Tankers President and CEO to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for the TK Group's fourth quarter and annual 2024 earnings conference call. Joining me on the call today for the Q&A session is Brody Spears, TK Corporations and TK Tankers CFO, Ryan Hamilton, our VP, Finance and Corporate Development, and Christian Waldegrave, our Director of Research. Starting on slide three of the presentation, we will cover TK Tango's recent highlights. TK Tango's reported adjusted net income of $52 million, or $1.50 per share, in the fourth quarter, and for the full year, 2024, adjusted net income of $355 million, or $10.31 per share. Despite softer than expected spot rates towards the end of the year, the company still generated $69 million in free cash flow in the fourth quarter and $415 million for the year. In the last few weeks, as part of our opportunistic approach to ongoing fleet management, we sold two 2009-built Suez Maxes and one 2006-built LI2 for a combined $96 million. Two of these vessels have already been delivered to their buyers, while the third is expected to be delivered by mid-March upon completion of its current voyage. Including the previously announced two vessels we sold during Q4, we have sold a total of five 2005 to 2009-built vessels for combined proceeds of $160 million, resulting in expected book gains on sale of nearly $60 million. Further, I'm pleased to report that just today we lifted subjects and signed an MOA to acquire a modern LR2 tanker, which we expect to close in the second quarter. These sales and purchases are part of our ongoing fleet management and fleet renewal plan, where we naturally sell older vessels and acquire more modern tonnage over time when the opportunity is right. In addition, we have now completed T&K's acquisition of the TK Australia business and the transfer of all the remaining management services companies not previously owned by T&K. These transactions transformed TK Tangers into a fully integrated shipping company and the sole operating platform within the TK Group. We also made a passive investment in Ardmore Shipping Corporation, where we now own 5.1% of the company. Historically, TK has had investments in adjacent sectors, to our medium-sized crude tanker business, including some exposure to the MR sector in the past. We believe that this investment represents good value in the product sector. Looking at our first quarter to date spot rates, our rates spoke to data slightly below our fourth quarter levels, but remain volatile and trending upwards based on the latest Clarkson's report spot rates. Although these rates are down from historical highs from 2023 and 2024, Current rates are well above our feed's free cash flow break-even levels, meaning TK Tangers continues to generate substantial free cash flow and earnings in the current market environment. We will discuss the drivers of the market in subsequent slides. Lastly, TK Tangers declared its quarterly fixed dividend of $0.25 per share payable in March, and for the full year, we have paid $3 per share in dividends. Moving to slide four, we look at recent developments in the spot market. Weak Chinese oil demand during the latter part of the year weighed on the VLCC market, which in turn had a dampening effect on Suezmax and Afromax spot rates, while seasonal weather delays failed to give any uplift to the Tanger market during the winter months. Rates were still above long-term average levels and well above TNK's free cash flow breakeven of approximately $14,300 per day. Average Q1 to date spot tanker rates are slightly below fourth quarter levels, but have been trending upwards in recent weeks. The imposition of additional U.S. sanctions on 153 tankers servicing the Russian oil trade has increased rate volatility, particularly in the larger crude tanker asset classes, as replacement shipping capacity was booked for transporting oil to China and India. In addition, Atlantic-based crude oil has been attractively priced when compared to Middle Eastern crude in recent weeks, which has opened the arbitrage for the long-haul movement of oil from the Atlantic Basin to Asia. This has been positive for ton-mile demand in the near term, particularly for VLCC and Suezmax tankers. Turning to slide five, we look at some of the geopolitical events that are currently unfolding, which seem to change day by day. And there are likely more questions than answers on how things will progress over the course of this year. As highlighted by the slide, there are an unusually large number of factors this year which could influence the direction of the tanker market. I won't go into every single point in detail, but it's worth highlighting three of the key factors which we believe could impact the tanker market, depending on how they unfold in the coming weeks and months. Firstly, the red highlights the current conflicts in Ukraine and the Middle East. Starting with the war in Ukraine, the situation has become extremely dynamic in recent weeks. While we do not know how events will unfold, will continue to unfold in the future, we do know that there could be wide-ranging consequences for both tankers on mild demand and the future of the shadow fleet of ships that are currently servicing Russian oil exports should a peace agreement be reached. In the meantime, we can envision scenarios whereby sanctions against Russia are either tightened or loosened, depending on how discussions between the various parties develop. For example, we understand that the EU is planning a new round of sanctions next week, which will include another 73 ships being added to the sanctions list. These sanctions could further impact Russia's ability to export oil, as evidenced by the last round of sanctions in January, where statistical constraints meant that India And China had to source replacement barrels from the Middle East and Atlantic Basin on non-sanctioned vessels to make up for the shortfall in Russian supply. In the Middle East, the recent ceasefire between Israel and Hamas has led to the Houthi group in Yemen pledging to stop attacks on shipping. This may eventually result in the resumption of tanker transit through the Red Sea region, which, depending on how things unfold, could impact seaborne trade patterns and reduce tanker ton mile demand. However, the situation is fragile, and for the time being, we expect that owners like TK and Cargo Interest will continue to stay away from the region until there's more certainty around the safety of crews, vessels, and cargoes. Secondly, the yellow highlights the impact of sanctions on crude oil exports from Russia, Iran, and Venezuela, as well as the fleet of ships servicing them. I've already touched on the situation with regards to Russia. But another key development this year is the return of the United States' maximum pressure campaign on Iran in a bid to reduce Iranian oil exports to zero. In 2024, Iranian crude oil exports averaged 1.5 million barrels per day, the majority of which went to China. Topper sanctions on Iranian crude oil exports could therefore lead China to import oil from other sources via the compliant fleet, which would be positive for tanker demand. Finally, the blue highlights the potential impact of tariffs on oil trade flows. In early February, the U.S. announced 25% tariffs on imports from Mexico and Canada, with a lower 10% tariff on Canadian energy, though the implementation of these tariffs was suspended for 30 days. Should these tariffs come into force, we could see Canada and Mexico looking to divert some of their crude exports away from the U.S. to other regions. such as Europe and Asia, while the U.S. refiners may have to find replacement barrels from further afield, both of which would be positive for tangleton mild demand. Regarding Canadian exports, we know that there are plans to commence nighttime loading from the Trans Mountain Pipeline Terminal in Vancouver later this year, which would allow the terminal to reach 28 to 30 APROMAX cargoes per month, compared to 22 to 24 at present. It is difficult to predict 2025 impacts, but geopolitical uncertainty and changes to seaborne oil trade patterns usually increase tanker market volatility and supply chain inefficiencies. Turning to slide six, we look at the underlying tanker demand and supply factors, which we believe continue to support a balanced market, notwithstanding the geopolitical events that are just touched on. Starting with Sanger demand drivers, global oil consumption is projected to grow by 1.3 million barrels per day in 2025. Virtually all of this demand growth is being driven by non-OECD countries led by Asia. Global oil supply is also set to grow with production from non-OPEC-plus countries set to increase by 1.5 million barrels per day in 2025, led by the United States, Brazil, Norway, Canada, and Guyana. Given that these sources of oil are mostly in the Atlantic Basin, while oil demand growth is focused on Asia, we expect an increase in long-haul crude oil movements from west to east, which should boost tanker ton-mile demand. The OPEC Plus Group could also provide additional seaborne transportation volumes should they start unwinding their voluntary oil supply cuts from April 2025 onwards, consistent with their most recently announced plan. Turning to fleet supply, midsize tanker fleet growth is expected to remain relatively low in the medium term. As shown by the chart on the bottom right of the slide, the current size of the tanker order book is relatively similar to the fleet of older tankers turning age 20 during the same time period, with 307 midsize tankers currently on order for delivery through 2028, compared with 312 existing midsize tankers that will turn 20 over the same timeframe. In addition, there are 301 midsize tankers which are already over the age of 20, the majority of which operate as part of the Seattle fleet servicing sanctioned trains. and which are facing increased scrutiny from U.S. and European authorities. In sum, assuming no scrapping, we could have over 600 midsize tankers, or approximately 30% of the fleet, over the age of 20 years old in three years' time, which is unprecedented. And for comparison, at the end of 2021, there were around 115 midsize tankers over the age of 20. This illustrates the scale of the excess fleet supply that could be phased out should trade normalize. While it is difficult to predict what will ultimately happen with the shadow fleet, and it is uncertain when we may see an uptick in vessel recycling, we believe that with a manageable order book, a lack of available shipyard capacity until 2028, and a tanker fleet which is currently the oldest in well over 20 years, Tanger fleet growth will remain at low levels over the next three years. In sum, while there are a wide range of potential outcomes from the various current issues impacting global trade, security, and energy, we remain encouraged by the underlying Tanger supply and demand fundamentals, which we believe point towards a balanced Tanger market over the medium term. Turning to slide seven, we highlight how TK Tangers is well-positioned for any market conditions. With our high operating leverage and a low free cash flow breakeven of $14,300 per day, we can generate significant cash flow in almost any market conditions. To emphasize, every $5,000 of increase in spot rates above our breakeven produces $2.15 per share of annual free cash flow, or over 5% on a free cash flow yield basis. Combined with our strong balance sheet, we've built optionality and capacity to maximize shareholder value in any market outcome. With that operator, we're now available to take questions.