Teekay Tankers Ltd. (NYSE:TNK) Q1 2024 Earnings Call Transcript

Teekay Tankers Ltd. (NYSE:TNK) Q1 2024 Earnings Call Transcript May 9, 2024

Teekay Tankers Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Teekay Tankers Limited First 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. [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.teekay.com, where you’ll find a copy of the first quarter 2024 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 2024 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 2024 earnings conference call. Joining me on the call today is 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 $151 million up from the $127 million we generated last quarter. The company reported adjusted net income of $132 million or $3.86 per share, an increase from a $100 million or $2.91 per share in the fourth quarter of 2023. With our fleet of mid-size tankers trading almost entirely in the strong spot market, Teekay Tankers’ high operating leverage enabled us to continue generating significant earnings.

As a reminder, for every $5,000 increase in tanker rates above our free cash flow breakeven of $16,000 per day. We expect to generate approximately $2.40 of annual free cash flow per share. Stewart will provide further information on this later in the presentation. In March, we completed the repurchase of the remaining eight vessels on sale leaseback arrangements for $137 million, reaching the major milestone of being debt free. With our balance sheet strength, recent financial performance, and the positive market outlook, we continue to take a balanced approach to capital allocation. In line with our capital allocation plan, we have declared a fixed quarterly cash dividend of $0.25 per share for the first quarter of 2024. In addition, we have declared a special dividend of $2 per share.

Including these dividends, Teekay Tankers have declared cash dividends of $4.25 per share since updating our capital allocation plan last year. Teekay Tankers’ mid-size spot rates for the first quarter of 2024, the second highest in the company’s history, second only to last year’s spot rates. These firm’s spot rates have continued through the first half of the second quarter as well. The recent expansion of the Trans Mountain pipeline to Vancouver with first cargo is planned for this month will create a new source of Aframax demand, which is expected to support Aframax spot tanker rates as volumes ramp up over the coming months. I will talk more about this important development later in the presentation. Looking ahead, tanker supply and demand fundamentals remain positive and point toward continued tanker market strength in the medium term.

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Q&A Session

Finally, we completed the previously announced sale of 2004-built Aframax during the first quarter for total proceeds of $23.5 million, recording a gain on sale of $11.6 million. Turning to Slide 4. We look at the dynamics in the spot tanker market. As mentioned in the highlights, Q1 saw the second highest mid-size tanker spot rates for a first quarter in Teekay Tankers’ history, second only to the exceptional rates recorded in Q1 of last year. Rates were supported by a combination of factors including firm tanker ton-mile demand, limited fleet supply growth, normal seasonality and trade route disruptions due to geopolitical events, which led to an increase in average voyage distances. These factors have continued to support spot tanker rates during the second quarter with rates remaining at firm levels.

Looking to the second half of the year, we expect the rates will remain well supported by rising oil demand, an expected increase in crude oil supply from non-OPEC countries, predominantly in the Atlantic Basin, and the start of exports from the newly expanded Trans Mountain Pipeline. Turning to Slide 5. We provide an update on our Suezmax and Aframax size spot rates in the second quarter to date. Based on approximately 59% and 54% of revenue days booked, Teekay Tankers’ first quarter to date, Suezmax and Aframax size vessel bookings have averaged approximately $45,100 per day and $43,900 per day, respectively. Importantly, I would once again highlight the value being created by Teekay Tankers’ eight vessel chartered-in fleet of which seven are trading in the strong spot market.

With an average in-charter rate level of $25,400 per day, the chartered-in fleet has a current mark-to-market value of approximately $54 million. Turning to Slide 6. If you look at the impact of the Trans Mountain Pipeline expansion or TMX, which we believe will provide a significant boost to Aframax specific demand going forward. On May 1, The Trans Mountain pipeline expansion commenced commercial operations with first cargoes expected later this month. The new pipeline has a capacity to carry 590,000 barrels per day of Canadian crude oil for loading on to Aframax tankers, which is the maximum size of vessel that can load from the terminal due to draft restrictions. Given that the first cargoes have yet to load, there is still uncertainty regarding the ultimate destinations of the crews exported from TMX.

However, we have identified four potential trades which could develop to bring this oil to market. First, given the characteristics of Canadian crude, we believe that the barrels are well suited to refineries in the U.S. West Coast particularly in California, where cargoes would be transported directly on Aframaxes. Secondly, we expect the Asian buyers will look to acquire Canadian oil given its price discount to equivalent grades from other sources. This oil could be transported directly to Asia on Aframaxes, and we’ve already seen one customer booking in Aframax for May loading dates with discharge in China. Alternatively, Asian buyers may find their economies of scale to be gained from parceling up Aframax cargoes to a larger VLCC or Suezmax.

The most likely locations for these reverse lighterings are in the Pacific area lightering zone off the coast of Southern California or off Panama, where other grades of Latin American crude maybe co loaded. Again, we have already seen a customer taking this latter option with reports that a major refiner has booked Aframax from TMX for parceling up to a VLCC of Panama for onward delivery to India. These new trade routes are expected to increase Aframax demand going forward, particularly as Vancouver is relatively far from the main Aframax trade lanes in Asia and the U.S. Gulf, meaning that vessels will have to be pulled in from these regions to meet demand. To give some context, the distance from Vancouver to Southern California is around 1,200 nautical miles or 12 voyage days on a round trip basis, including load and discharge time.

While the distance from Vancouver to China is around 6,000 nautical miles or 44 voyage days. Assuming a 50/50 split between these two destinations, we estimate that the Trans Mountain expansion could create incremental demand for around 25 to 30 Aframax once the pipeline is at full capacity. Turning to Slide 7. We look at supply and demand factors, which we believe support continued tanker market strengths over at least the medium term. Fleet supply fundamentals continue to look positive. Despite an increase in the pace of new tanker orders in recent months, the tanker order book is small by historic standards at 9% of the fleet delivering over the next three years. The order book is particularly small this year with just 2.4 million deadweight tons of new tankers delivering into the fleet during the first quarter of 2024, which is the lowest delivery total for a first quarter since 1989.

Furthermore, the tanker fleet is aging with the average age of the global fleet at its highest points since 2003, coming in at 13.2 years. While ships are not being scrapped in the current high spot rate environment, vessels that trade beyond age 20 are seeing a significant drop in utilization compared to the vessels below 20 years of age, thereby reducing effective fleet supply. As a result, we project close to zero tanker fleet growth in 2024 with modest growth of around 1% in 2025. Looking at demand, the average forecast for the major oil agencies projects healthy oil demand growth of 1.5 million barrels per day in both 2024 and 2025. The majority of this demand growth is expected to be met by increasing oil supply from the non-OPEC countries, particularly from producers in the Atlantic Basin, which suggests that tanker ton-mile demand will continue to benefit from an increase in long-haul movements from the Atlantic Basin to Asia.

As shown by the chart on the right of the slide, tanker ton-mile demand growth is expected to outstrip fleet supply growth both this year and next, continue the trend that started in 2022. This compounding impact of demand growth exceeding supply growth should continue to support high levels of tanker fleet utilization and firm tanker rates through at least the medium term. I’ll now turn the call over to Stewart to cover the next slide.

Stewart Andrade: Turning to Slide 8. We highlight how well Teekay Tankers is positioned to continue creating significant shareholder value in 2024 a year that we expect to be another strong tanker market. With 98% of our 51 vessel fleet operating in the strong spot tanker market that is being supported by the various factors we have talked about today. We feel confident in our ability to continue creating significant shareholder value. In the first quarter, TNK generated $156 million or $4.54 per share of free cash flow. If we use the trailing 12-month average of TNK’s realized spot rates and project that forward, our annualized free cash flow would be approximately $14 per share or free cash flow yield of approximately 22%.