Teekay Tankers Ltd. (NYSE:TNK) Q1 2023 Earnings Call Transcript May 11, 2023

Teekay Tankers Ltd. beats earnings expectations. Reported EPS is $5.13, expectations were $4.38.

Operator: Welcome to Teekay Tankers Ltd.’s First Quarter 2023 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. [Operator Instructions] 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.

Unidentified Company Representative: Before we begin, I would like to direct all participants to our website at www.teekaytankers.com, where you will find a copy of the first quarter 2023 earnings presentation. Kevin and Stewart 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 first quarter 2023 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Mackay, Teekay Tankers’ President and CEO, to begin.

Kevin Mackay: Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers’ first quarter 2023 earnings conference call. Joining me on the call today are Stewart Andrade, Teekay Tankers’ CFO; and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $206 million in the first quarter, an increase of approximately $26 million in the fourth quarter of 2022. We reported our highest ever quarterly adjusted net income with nearly $175 million or $5.13 per share, an increase from a record fourth quarter of 2022 adjusted net income of approximately $148 million or $4.33 per share.

Our strong results have enabled us to reduce our net debt by almost 50% since last quarter to $182 million. We have also finalized a revolving credit facility for up to $350 million to refinance 19 vessels as we continue to exercise purchase options on vessels in sale-leaseback arrangements. With strong third quarter spot rates and our high operational leverage, Teekay Tankers generated almost $194 million of free cash flow, including approximately $19 million from our eight chartered-in vessels. As previously mentioned, for every $5,000 above our free cash flow breakeven of approximately $15,000 per day, we expect to generate $2.64 in free cash per share annually. Given the substantial progress the company has made in building financial strength and how well we are positioned to benefit in strong tanker market, Teekay Tankers has transitioned to a capital allocation approach under which our existing focus on financial strength and disciplined future fleet reinvestments is supplemented by returning capital to shareholders.

Namely, from this quarter, we have initiated a fixed quarterly dividend of $0.25 per share. In addition, based upon a holistic assessment of the company’s position, including the last few quarters’ performance and our expectations moving forward, the Board has also approved a special dividend of $1 per share. Finally, we’ve put in place a $100 million share repurchase program, which provides us with an additional lever to create shareholder value. For mid-sized tankers, spot rates during the first quarter of 2023 were the highest ever of the first quarter of a year and remained firm albeit volatile in the early part of the second quarter. We’ve recently seen record high U.S. crude oil exports and crude volumes out of Russia remain strong, adding significant support to mid-sized tankers.

Overall, global oil demand remains on track to increase by 2 million barrels per day this year, driven in large part by China’s economic recovery and increased travel following the relaxation of COVID lockdowns. Perhaps most importantly, fleet supply fundamentals remain in excellent shape with low fleet growth virtually ensured for at least the next few years. Turning to Slide 4. We look at recent developments in the spot tanker market. Spot tanker rates remained at historic highs in the first few months of 2023. As mentioned, spot rates in Q1 were the highest ever recorded for the first quarter of the year, given by record high crude oil exports in the U.S. Gulf and increase in long-haul movements in the Atlantic to the Pacific spurred by rising Chinese crude oil imports, and an increase in Russian crude oil exports, which are now moving almost exclusively on long-haul voyages to Asia.

Mid-sized tanker spot rates have remained firm at the start of the second quarter, albeit with high levels of volatility, which is typical in a tight tanker market environment. We anticipate spot rates to remain volatile due to continued strong fleet utilization interspersed by typical seasonal factors in the coming months. Turning to Slide 5. We provide a summary of our spot rates in the second quarter to-date. Average second quarter to-date rates have remained historically strong. Based on approximately 44% and 41% of revenue days booked, Teekay Tankers’ first quarter to-date Suezmax and Aframax size vessel bookings have averaged approximately $62,400 per day and $58,500 per day respectively. Importantly, I would highlight that TNK has eight ships currently chartered-in at an average cost of $24,300 per day with a mark-to-market value of approximately $68 million.

Six of these vessels are currently trading the spot market. Turning to Slide 6. We look at some of the factors that have been supporting mid-sized tanker demand over the past few months. Firstly, U.S. crude oil exports have been on a rising trend in recent months, and Q1 reached a record high average of 4 million barrels per day with some weeks reaching over 5 million barrels per day. Almost half of these volumes were shipped to Europe directly on Aframax and Suezmax tankers leading to an increase in mid-sized tanker ton-mile demand with additional volumes being transported long-haul to Asia on VLCCs, treating elevated demand for Aframax lightering in the U.S. Gulf. Secondly, Russian seaborne crude oil exports have increased since the start of the year with exports in Q1 reaching 3.4 million barrels per day, an increase of 0.5 million barrels per day from Q4.

Furthermore, over 90% of these volumes are now flowing long-haul to India and China following the implementation of the EU ban on Russian crude oil imports, creating significant ton-mile demand for mid-sized tankers, given that VLCCs cannot load directly from shallow draft Russian ports. While Teekay Tankers does not transport Russian oil, the stretching of the mid-sized tankered fleet as a result of new trading patterns to import replacement oil to Europe, coupled with a growing shadow fleet ships to service Russian trades and which typically or generally trade less efficiently than the regular fleet have benefited the wider midsized tanker market. Although Russia announced an oil supply cut of 0.5 million barrels per day from March of 2023 onwards, this is currently not being reflected in Russian crude oil export volumes.

We’ve remained firm in the early part of Q2. Turning to Slide 7. We look at the outlook for oil demand and supply through the remainder of this year. As per the IEA, global oil demand is projected to grow by 2 million barrels per day in 2023 to a record high of just under 102 million barrels per day. Non-OECD countries, led by China, are expected to account for 90% of this growth, with OECD demand being impacted by slower economic growth due to high inflation and rising interest rates. Oil demand is expected to accelerate during the second half of the year, as Chinese economic growth gathers pace with reported GDP growth of 4.5% in the first quarter, providing a positive sign of an accelerating Chinese economy. Looking at oil supply, the OPEC+ group announced that a surprise oil production cut of 1.16 million barrels per day from May through the end of the year in response to lower oil prices and uncertainty over the global economy.

This may negatively impact seaborne oil volumes, and although the impact will primarily be felt in the VLCC sector given that the majority of the cuts are from Middle Eastern producers, there could also be a negative knock-on effect for all crude tanker segments in the coming months. Turning to Slide 8, we look at the positive tanker supply and demand fundamentals, which we believe lay a strong foundation for extended market strength over the next few years. Fleet supply fundamentals remain very positive. The global tanker orderbook when measured as a percentage of the fleet remains at a record low of approximately 4%. Although the pace of new tanker ordering has picked up since the start of the year, most shipyards are now effectively full through the end of 2025.

Furthermore, the number of new orders that have been placed is relatively small when compared to the fleet of older vessels, which will need replacing in the coming years. And therefore, at this stage, we do not feel this recent ordering uptick is having a material impact on overall fleet supply in the medium-term. The combination of a small orderbook and little stair shipyard capacity through mid-2026 virtually ensures low fleet growth over the next two to three years with approximately 2% fleet growth expected this year and negligible levels of fleet growth in both 2024 and 2025. As shown by the chart on the right of the slide, tanker demand growth is expected to far outweigh fleet supply growth over this time period, setting the stage for increased fleet utilization, which should drive an extended upturn in tanker spot rates over the medium-term.

I’ll now turn the call over to Stewart to cover the financial slides.

Stewart Andrade: Thanks, Kevin. Turning to Slide 9. We highlight the company’s high operating leverage and what that means for TNK’s capacity to generate cash flow and create shareholder value in a strong tanker market. With 96% of our fleet trading in a firm spot market, our earnings in recent quarters demonstrates the power of having 51 vessels trading in the spot market, generating significant free cash flow. As an illustration of that, if Q1 2023 spot rates continue for the full-year, we would generate approximately $24 per share of annual free cash flow equating to a free cash flow yield of over 60%. Our strong cash flows have been used to strengthen TNK for the long-term by rapidly paying down debt. In addition, they have allowed us to optimize our capital structure by exercising purchase options on vessels we had previously put into sale-leaseback financing agreements.

By Q4, we expect this optimization to have reduced our breakeven rate by approximately $400 per day. Turning to Slide 10, we look at Teekay Tankers updated capital allocation plan. As we have previously communicated throughout 2022, our capital allocation was focused on building balance sheet strength. And I’m pleased that we have made excellent progress in that regard. Since the beginning of 2022, we have generated over $480 million of free cash flow, reduced our net debt by over $400 million to $182 million, and reduced our net debt to balance sheet capitalization from about 40% to less than 13%. Highly supportive market conditions and our operating leverage enabled us to accelerate our progress and we are now pleased to revise our capital allocation plan.

Our updated capital allocation plan will maintain a focus on building financial strength for future fleet reinvestments when market conditions are supportive. In addition, we are initiating a $0.25 per share fixed dividend. This dividend enables us to continue building financial strength while also consistently providing a return of capital to our shareholders. A holistic assessment that considered the company’s performance in recent quarters and our outstanding progress in building financial strength combined with our tanker market outlook and the company’s future capital needs resulted in the Board declaring a special dividend of $1 per share. While it is not our intention to utilize special dividends as a regular recurring supplement to our fixed quarterly dividend, we have chosen to do so at this time, providing not just immediate value to our shareholders, but also establishing a further means by which TNK can optimize its capital allocation.

Finally, we have put in place a $100 million share repurchase program, which provides us with another capital allocation tool, enabling us to act opportunistically to take advantage of equity market dislocations when TNK has excess capital. I will now turn the call back to Kevin to conclude.

Kevin Mackay: Thanks, Stewart. In summary, Teekay Tankers is in a great position with our sizable fleet of well-maintained quality Aframax LR2 and Suezmax tankers to benefit from strong tailwinds supporting the mid-sized tanker market. Robust tanker market fundamentals indicate multi-year support or healthy tanker market environment, which should enable us to continue creating shareholder value by generating meaningful cash flows, returning capital to shareholders, and seeking opportunities to reinvest in our business and fleet in a disciplined manner. With that, operator, we are now available to take questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And with that we’ll go ahead and take our first question from Jon Chappell with Evercore ISI. Please go ahead.

Operator: And we’ll go ahead and move on to our next question from Omar Nokta with Jefferies. Please go ahead.

Operator: And our next question is going to come from Ken Hoexter with Bank of America. Please go ahead.

Operator: With that, that does conclude our question-and-answer session. I would like to hand the call back over to the company for any additional or closing remarks.

Kevin Mackay: Thank you for joining us today and we look forward to speaking to you next quarter.

Operator: With that, that does conclude today’s call. Thank you for your participation. You may now disconnect.