Teekay Tankers Ltd. (NYSE:TNK) Q4 2023 Earnings Call Transcript

Teekay Tankers Ltd. (NYSE:TNK) Q4 2023 Earnings Call Transcript February 22, 2024

Teekay Tankers Ltd. misses on earnings expectations. Reported EPS is $2.91 EPS, expectations were $3.5. TNK 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 the Teekay Tankers Limited Fourth Quarter 2023 Earnings Results Conference Call. [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 fourth quarter and annual 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 fourth quarter and annual 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’ fourth quarter and annual 2023 earnings conference call. Joining me on the call is Stewart Andrade, Teekay Tankers’ CFO. Moving to our recent highlights on Slide 3 of the presentation, Teekay Tankers reported adjusted net income of $99.5 million or $2.91 per share an increased from last quarter’s levels of $76.6 million or $2.24 per share respectively. The company’s 2023 adjusted net income of $500.5 million or $14.65 per share was more than double our strong 2022 earnings and established a new record for Teekay Tankers highest ever annual net income. Amid historically strong spot rates, the significant value of our high operating leverage is clear.

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 $2.50 of annual free cash flow per share. We will provide further information of this later in the presentation. In January, we gave notice to repurchase the remaining eight vessels on sale leaseback arrangements for $137 million. Once complete, this repurchase will bring the total number of vessels repurchased since March 2023 to 27 vessels for a total of $501 million reducing our total debt outstanding to zero and decreasing our cash breakeven rates. In line with our fixed quarterly dividend policy, we have declared a cash dividend of $0.25 per share for the fourth quarter of 2023. In the market, 2023 turned out to be the best year for midsize tanker spot rates in TNK’s history due to a combination of strong oil demand growth, longer voyage distances and low fleet growth.

Rates have remained firm at the start of 2024 with seasonal and geopolitical factors adding to an already tight tanker market. Looking further ahead, we believe that strong tanker supply and demand fundamentals will continue to support tanker fleet utilization and rates over the next two years to three years, albeit with periods of pronounced spot rate volatility. Finally, we sold 2, 2004 built Aframaxes during the fourth quarter for total proceeds of $46.5 million recording a gain on sale of $10.4 million in December and an expected gain of approximately $11.5 million in Q1 of this year. Both of these vessels now have been delivered to their new owners. Turning to Slide 4, we look at dynamics in the spot tanker market. As mentioned on the highlights slide, midsize spot tanker rates during 2023 were the highest in Teekay Tankers history with rates averaging around $48,500 per day.

Global oil demand grew by approximately 1.9 million barrels per day in 2023 per the IEA. As the world continued to rebound from the COVID-19 pandemic, was particularly robust growth from China following the removal of travel restrictions at the start of the year as well as from India. As a result, global oil demand moved above pre-pandemic levels for the first time to a record high of around 101 million barrels per day and has remained strong in the early part of 2024. Global oil supply also saw robust growth in 2023 despite OPEC+ supply cuts due to high output from non-OPEC countries. Oil supply growth was particularly strong in the Americas with U.S. crude oil exports reaching a record high of over 4 million barrels per day. Tanker demand saw a further boost from longer voyage distances during the year, which was the first full year following the EU’s ban on Russian crude oil imports and the G7’s price cap, which came into effect in late 2022.

As a result, over 90% of Russian crude oil exports moved long haul to India and China during the year. While Teekay Tankers does not participate in this trade, there has nonetheless been a significant overall boost to midsize tanker demand. Finally, despite an almost total absence of tanker recycling, the global tanker fleet saw less than 2% growth in 2023 due to a very small order book. This was far outweighed by tanker ton-mile demand growth of well over 7% leading to an increase in fleet utilization and strong rates. Spot tanker rates remained firm at the start of 2024 due to a combination of strong underlying fundamentals, seasonal factors such as weather delays and various regional disruptions. I’ll give more detail on these factors later in the presentation.

Turning to Slide 5, we provide an update on our Suezmax and Aframax size spot rates in the first quarter to date. Based on approximately 68% and 67% of revenue days booked, Teekay Tankers’ first quarter-to-date Suezmax and Aframax size vessel bookings have averaged approximately $50,100 per day $50,900 per day respectively. Importantly, I once again highlight the value being created by TNK’s eight vessel chartered in fleet with seven ships 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 $60 million, which is in addition to our owned fleet. Turning to Slide 6, we look at tanker supply and demand fundamentals, which we believe will continue to support high tanker fleet utilization for at least the next two years to three years.

Global oil demand is projected to grow by around 1.4 million barrels per day in 2024 as per the EIA, with further growth of 1.3 million barrels per day in 2025. This is in line with pre-pandemic levels of growth and indicates that demand growth for oil remains robust with consumption projected to reach 103.7 million barrels per day by the end of 2025, 3 million barrels per day higher than the level seen prior to the COVID-19 pandemic. Meanwhile, the outlook for tanker fleet supply remains extremely positive with minimal tanker fleet growth expected over the next two years to three years. This is especially true for 2024 with just 9 million deadweight tonnes scheduled to be delivered, the lowest annual total since 1997. The tanker order book remains small by historical standards at around 7% of the existing fleet size, while forward order book cover at global shipyards stands at 3.5 years, meaning there is little spare shipyard capacity until 2027.

The combination of a low order book, an aging tanker fleet and a lack of shipyard capacity until 2027 should lead to exceptionally low levels of tanker fleet growth over the next three years, including virtually no fleet growth in 2024. As shown by the chart on the bottom of the slide, tanker ton-mile demand growth is expected to outstrip fleet supply growth this year and in 2025, continuing the trend that started in 2022 and extended into 2023. This compounding impact of demand growth exceeding supply growth should continue to support high levels of tanker fleet utilization and firm tanker rates. Turning to Slide 7, we look at various events that are impacting tanker trades this year, which are creating additional rate volatility in an already tight market.

Starting on the right side of the slide, Russian crude oil exports flowing long haul to India and China via the shadow fleet should continue to support midsize tanker demand in 2024. In addition, there have been increased attacks on Russian refineries facilities in recent weeks, which may cut Russia’s ability to produce refined oil products and lead to more crude oil being available for export. In terms of oil supply, the majority of production growth in 2024 is expected to come from non-OPEC countries in the Atlantic Basin, led by the United States, Brazil and Guyana. Given that oil demand growth is expected to be concentrated in Asia, there could be an increase in Atlantic to Pacific crude oil movements, which would be beneficial for tanker ton-mile demand.

Disruptions to vessel transits in both the Panama and Suez Canals are also impacting the tanker market this year. While the Panama Canal is not a major transit corridor for crude oil tankers, the inability to transit the canal limits tankers owner’s ability to reposition ships between the Pacific and Atlantic Basins, and therefore creates inefficiencies, which from a tanker market perspective is generally positive as it leads to increased tanker utilization. With regards to the Red Sea, the increase in attacks on merchant shipping since last December is having an impact on tanker trade patterns. This is a dynamic situation, but in recent weeks there have been an increasing number of ship owners and operators avoiding the region and seeking alternative routes that involve longer voyages.

For many vessels, this means sailing around the Cape of Good Hope, adding a significant number of voyage days and creating additional tanker ton-mile demand. For example, Suezmax voyage from Basra, Iraq to the Mediterranean is about 4,000 nautical miles or 13 days via the Suez Canal compared to around 12,000 nautical miles or 40 days via the Cape of Good Hope. While it is impossible to predict how this situation will evolve, the rerouting of cargoes is likely to continue creating additional tanker demand in the near-term. Finally, the expansion of the Trans Mountain pipeline to Vancouver, Canada later this year will lead to a new source of Aframax specific demand. This pipeline with an increasing capacity of 590,000 barrels per day is intended to provide a new seaborne outlet for Canadian crude oil exports.

Given that the terminal is restricted to Aframax sized vessels, is anticipated that the expansion could result in up to 30 Aframax to 35 Aframax loadings per month. This is an exciting development and has the potential to create significant Aframax demand once the pipeline is up and running with the operator currently expecting the start of oil flows through the pipeline during the second quarter of 2024. So, in sum, the numerous changes to trade patterns around the world, which I’ve just described are leading to increased complexity and supply chain inefficiency creating additional tanker demand as a result and spot rate volatility in what is already a fundamentally very tight market. I’ll now turn the call over to Stewart to cover the next two slides.

Stewart Andrade : Thanks, Kevin. Turning to slide 8, we outlined some of Teekay Tankers’ key accomplishments in 2023. As noted earlier in the presentation, financially 2023 was a record-breaking year with the company generating just over $0.5 billion of adjusted net income and over $575 million of free cash flow. These strong results allowed us to transform our balance sheet, repurchasing 19 vessels from sale-leaseback arrangements and refinancing them with a new $350 million revolving credit facility, which provides us with greater financial flexibility. In addition, TNK ended the year with a net cash position of $226 million. As a reminder, after the repurchase of our final eight vessels in sale leaseback arrangements, we expect to be completely debt free by the end of the first quarter.

2023 was also a year of strong operational performance with 99.8% fleet availability and zero lost time injuries. A metric that we don’t often touch on during these quarterly investor calls, but which is extremely important for the safety of our crews and the reliability of our operations. Commercially, we continue to manage our lucrative time charter portfolio by extending in charters at rates well below the current spot market, enabling us to profit significantly from the spread. With all of these accomplishments in 2023, the successful execution of our strategy has created significant value for our shareholders through a combination of returning capital via dividends and the appreciation of our share price. Since the beginning of 2023, we have generated total shareholder return of 109%, which further builds on the significant shareholder value Teekay Tankers created in 2022.

Turning to Slide 9, we highlight the potential for TNK 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 a strong spot tanker market that is supported by robust tanker supply and demand fundamentals, and driven further by the various factors we have talked about today, we feel confident about our ability to continue creating shareholder value. As a demonstration, 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 $16.30 per share or free cash flow yield of approximately 28%. With this kind of operating leverage, strong prospects for midsize tankers moving forward and a growing cash position, we’re making progress in building Teekay Tankers’ strategic optionality for future fleet reinvestment.

I will now turn the call back to Kevin to conclude.

Kevin Mackay: Thanks Stewart. In summary, as we experienced in 2023, the fundamentals of our business continue to be highly supportive for what could be a protracted period of midsized tanker market strength. Most notably, a very positive tanker supply outlook grounded by a negligible multiyear newbuild delivery schedule. Oil demand continues to grow past the post-pandemic rebound. Beyond the fundamentals, a range of factors are introducing complexity and inefficiency into the market, tightening the supply and demand balance still further. Overall, we believe that our midsize tanker focus and spot market strategy places Teekay Tankers in an ideal position to continue capturing upside and realizing shareholder value moving forward. With that operator, we’re now available to take questions.

Operator: [Operator Instructions]. We will take our first question from Jon Chappell with Evercore.

See also 15 States with the Best Healthcare in the US and Top 20 Biggest Mortgage Companies in the US.

Q&A Session

Jon Chappell: Thank you. Good morning, Stewart and Kevin. First question is simply what’s next. You pointed out a great outlook for the industry. Your operating leverage is immense. You’ll be debt free in a matter of weeks. What comes next that the deleveraging is done?

Kevin Mackay: Yes. Jon, it’s a good question. And I think it’s really more of the same. I think we’ve been clear on over the last few quarters and explaining what our focus is. Our strategy is to continue to both build the strong cash position to reinvest in our fleet and to reinvest in our business and B, to reward shareholders through some of the capital allocation tools that we laid out in our capital allocation plan. So, I think just because we’ve crossed the, or we will cross the milestone of being debt-free, the strategy will remain the same.

Jon Chappell: It seems like since the special dividend, I think nine months ago now, there’s been no real acceleration in the capital allocation. I don’t think there’s been much in the terms of buyback, despite trading at a pretty big discount to most estimates of NAV. Do you think that that’s something that accelerates now in 2024 as you wait for the opportunity to reinvest in the fleet?

Kevin Mackay: It’s definitely something that as I said is in our tool bag. nine months ago, when we rolled out our capital allocation plan, it was based on a holistic view of our needs as well as what shareholders are looking for. And, I wouldn’t read into the fact that we may not have used one or two of the tools so far. We put them in there for a specific reason, and the discussion that we have at management level and with the board is always a holistic one around where we’re going, where can we add the best value, and what should we do with the money we’re generating. So, I think I wouldn’t read into the fact that we haven’t used anything so far as something that indicates that we won’t be using them in the future.

Jon Chappell: Just one more quick one. I mean, selling older assets makes a ton of sense, especially at these levels and you’re continuing to do that. Should we maybe think about renewing the fleet through sale and then just creating this massive buffer for when the cycle inevitably turns and then being opportunistic at some point in the medium to distant future?

Kevin Mackay: I think there’s a lot of ways you can look at it. And we’re not agnostic. Sorry, we are agnostic to where we can bring the most value to shareholders over time. So, in terms of what we’re looking at, whether it’s small acquisitions, large acquisitions, fleet dispositions, exiting individual ship assets as we did last quarter. Those are all in the discussion that we have both management and Board level.

Operator: We will take our next question from Omar Nokta with Jefferies.

Omar Nokta: Thank you. Hi, Kevin. Hi, Stewart. Thanks for taking my question. I do have a couple and definitely continuing the theme of John’s question. Stewart, you mentioned in your opening comments about you’re getting to the point now where you have optionality for future fleet reinvestment and you’ve been selling the older vessels, makes sense. You haven’t been replacing them with modern ones. So just wanted to check kind of and how you’re sort of thinking about the planned perhaps planned retooling of Teekay Tankers. Is it given the fact that asset values have started to really run away, are we sort of, are you thinking that maybe you close the book on reinvestment in this upcycle? And is the plan basically you build a war chest and be prepared for investments when the market eventually rolls over?

That’s one sort of one question I have and then maybe the second part of that is perhaps is tankers where you want to be long-term, or are you thinking of diverting down the line?

Stewart Andrade: Thanks for the very good questions. So maybe taking the first one first. So, we’ve been selling some vessels, a couple of vessels, our 2004 built, which were about to turn 20 years old and were drydock due. So that’s sort of just a normal part of moving those vessels on. In terms of looking at reinvestment, I guess, there’s a couple of ways to look at it. Asset prices are quite high. We also have a view that the tanker market is going to be very robust over the next few years. So, part of the consideration is always what are you paying for those assets, how much cash flow can you generate from them over the next few years and you’re potentially paying them down to a level that you’d be comfortable at. So just like time charters in and out are always looked at, we’re also looking at S&P.

So, I don’t think that we’ve closed the book on the opportunity to buy vessels. So, it’s not that we haven’t closed the book and we said, well, we’ll just come back when asset values come down. So, it’s something that we’re always evaluating. There’s, with our growing financial strength, we look at all sorts of opportunities, including the potential to acquire fleets, M&A everything. So, we are, as Kevin likes to say, we are agnostic over the approach that we would take, and we look at all those things as opportunities to reinvest in the fleet. So, we are committed to reinvestment and we will, if we can do it sooner and there’s opportunities that we think will create value for shareholders, then we’ll go ahead and do that. If we have to be more patient and wait, then we’ll do that.