Teekay Tankers Ltd (TNK) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Teekay Tankers Q2 restatement and financial position update 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). Now for opening remarks and introductions I would like to turn the call over to Mr. Bjorn Moller, Teekay Tankers President and Chief Executive Officer and Mr. Vince Lok, Teekay Tankers Chief Financial Officer. Please go ahead, sir.

Before Mr. Moller begins I would like to direct all participants to our website at www.TeekayTankers.com where you will find a copy of the presentation that Mr. Moller and Mr. Lok will review 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 financial restatement and update presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Thank you, Kent. And good morning, everyone. Thank you for joining us on today's call. With me from Teekay Tankers in Vancouver is Vince Lok, our Chief Financial Officer and we are also joined from Teekay Corporation by [Brian Fortier], corporate controller and Peter Evensen, chief strategy officer, is joining us from Connecticut. On our call today Vince will walk you through the financial restatement process that has taken place in Teekay Tankers recently, discuss its findings and highlight the changes made as a result of this review. After Vince's presentation I will review Teekay Tankers' financial condition and the reasons why we believe we are in a good position, the foundations of our business model, which are tactical fleet management that shields us from the lows of the spot tanker market while retaining upside, a strong liquidity position and a favorable and flexible debt profile with minimal principal repayments for several years, place us in a very well to generate surplus cash flow and pay dividends even in today's tough economic and financial climate.

Turning to slide number three, subsequent to the release of our results for the second quarter of 2008 in early August, we determined in connection with a detailed restatement audit which was initiated at our parent company, TK Corporation, that we would be required to restate our previously reported financial results. This accounting restatement process has now been completed, and I am pleased to be able to report to you that all of our reported changes are non-cash in nature and have not impacted our cash flow, liquidity or our cash available for distribution.

This is probably best evidenced by the strong dividends of $1.07 per share declared yesterday for the third quarter, the announcement of which was delayed while we completed the restatement. It is important to point out that the restatements are strictly related to accounting treatment and presentation and do not relate to any accounting irregularities and do not call into question the integrity of our core financial information.

Lastly, as a result of this review we have made a number of changes to our accounting statement processes to avoid having this happen again in the future. Due to the extent of work required by our accounting team and our auditors to complete the restatement for Teekay Tankers and the three other companies in the TK group, our Q3 earnings release will be delayed until mid December. I will therefore not be in a position to discuss our expected Q3 results on today's call. I will now turn it over to Vince to walks us through the accounting restatements.

Thank you, Bjorn. Turning to slide four, I will briefly review the restatement process we have just completed and describe the restatement in more detail. As Bjorn mentioned, subsequent to the release of the results for the second quarter of 2008 in early August, we determined in connection with a detailed restatement audit which was initiated by our parent company, Teekay Corporation that we would be required to restate our previously reported financial results.

This restatement process took longer than we anticipated in part because of the thoroughness of the review process, the sheer volume of detailed audit work that was undertaken and the expanded scope of the restatement. The audit process for Teekay overall involved subject matter experts from Ernst & Young's Vancouver office, as well as their Canadian and US national offices. In addition, we engaged the services of another accounting firm to assist throughout the process.

In addition to FAS 133, we also reviewed the other areas of complex or evolving counter standards to ensure that they had been appropriately applied. From this review a few other related areas were unexpectedly brought into scope, including the need to restate Teekay Tankers' financials. As a result, we have made changes to the way the company accounts for its derivative transactions, which are used to economically hedge our interest rate risk. In addition, we have made changes to our accounting for certain vessels we acquired from TK Corporation subsequent to our 2007 IPO. I will discuss each of these items in more detail.

Turning to slide five, I will briefly describe the changes in our hedge accounting treatment. In connection with our IPO, our interest rate swap was [novated] to us from our parent company and had a value at that date. The hedge documentation supporting the assessment of effectiveness and the measurement of ineffectiveness of the interest rate swap agreement was not in accordance with the strict technical requirements of FAS 133 for a derivative with a non-zero value. As a result, we are no longer able to obtain hedge accounting for that swap.

Just to summarize the difference in accounting treatment between applying hedge accounting and not applying hedge accounting, in both cases all derivative instruments are mark to market quarterly. However, under hedge accounting the unrealized portion of the change in fair value of the derivative would be recorded directly to stockholders equity on the balance sheet. Whereas the unrealized gain and losses are recorded on the income statement when hedge accounting is not applied.

This change in accounting treatment will lead to greater volatility of reported GAAP net income. However, this will have no impact on the company's cash available for distribution and dividends. An important point I would like to make at this time is to explain why the mark to market adjustment of derivatives is unrealized and non-cash. Some companies finance themselves with fixed rate bonds, while others including Teekay Tankers, find it cheaper to create fixed rate liabilities by borrowing from banks at floating LIBOR rate, and then using an interest rate swap, a derivative to create a fixed rate.

We use interest rate swaps to hedge or lock in a portion of our interest rate costs. When we enter into a derivative transaction we intend to hold the position until maturity as with a bond to lock in our costs. However, with the fair value -- while the fair value of both the bond and the derivative may change each quarter as the underlying market interest rates change, accounting conventions specifies that only the derivative must be mark to market. If we hold the derivative instrument from inception to maturity, all of the cumulative unrealized gains and losses would net to zero at maturity.

Therefore the change in value would only be realized if we were to unwind the interest swap position before maturity. As a result, the change in accounting treatment for our interest rate swap does not impact the economic effectiveness of the hedging transaction, nor our actual cash flows.

Turning to slide six, subsequent to the release of our second-quarter results, we reviewed the implications of an impending change to the accounting rules for business combinations. During that review we determined that although there are currently two alternative accounting treatments available, the SEC's preference is to treat vessels acquired from drop downs from Teekay Corporation as acquisition of businesses rather than acquisition of assets.

As a result of this change in accounting, after the drop-down of the two Suezmaxes to us in April 2008 from Teekay Corporation, we have now recast our historical results to include the results of these acquired vessels as if they had been owned by us from the date the vessels were originally under the control of Teekay Corporation. This change in accounting has no impact on the financial results of Teekay Tankers subsequent to the date the vessels were acquired by us. This accounting treatment is also consistent with what the new accounting standard will require when it comes into effect in 2009.

Turning to slide seven, we have reproduced a summary of restated second-quarter 2008 results from our news release to show that the cash dividend per share has not changed as a result of these restatements. Because the adjustments are non-cash in nature. The same is true for all the periods covered by the restatements.

Turning to slide eight, we have summarized the changes that have been made in our accounting processes as a result of this restatement. We have implemented a more rigorous process to determine the accounting treatment for complex accounting issues and nonroutine financial structures and arrangements, which includes the engagement of appropriately qualified external expertise.

At this time we have decided to no longer apply hedge accounting treatment to our interest rate swaps. This will lead to greater volatility of reported GAAP earnings, particularly to interest expense. However, we will provide sufficient information in future earnings releases to enable readers to identify the amount of the unrealized gains and losses from such derivative instruments.

In addition to the changes made by the company, our independent auditors, Ernst & Young, have also strengthened their team to include relevant subject matter experts going forward. In summary, Teekay has always prided itself on the quality and integrity of its financial reporting, so we are obviously disappointed to have had to go through an accounting restatement.

To underscore the point Bjorn made at the outset, the restatements did not relate to any accounting irregularities or call into question the integrity of our core financial information. I will now turn the call back to Bjorn who will review Teekay Tankers' financial position.

Thank you, Vince. As I am sure is the case for just about every company out there these past months, we've received a number of questions recently regarding the Company's financial condition. The accounting restatement process has kept us on the sidelines with respect to addressing such questions, but with the restatement now completed I welcome this opportunity to review with you now the highlights of Teekay Tankers' financial condition.

Turning to slide 10, we believe that Teekay Tankers is well positioned in the current difficult economic and financial environment for a number of reasons. We have a strong liquidity position. We have a favorable debt profile with minimal principal repayments and no covenant concerns and our tactical fleet management approach creates a low spot vessel cash flow breakeven. And I will address each of these topics on the following slides.

Slide 11 provides a financial snapshot of Teekay Tankers. We are pleased to announce -- we were pleased to announce yesterday a record quarterly dividend of $1.07 per share for Q3 giving us a dividend yield of 47.5% based on annualizing our dividends for the first nine months of the year. At the end of June 30, 2008 we had total liquidity of $75 million. In mid-December we will update this liquidity position to September 30, 2008 when we release our Q3 earnings, but we do not expect it to be materially different.

We have no requirements to tap the equity markets, and we have no CapEx commitments at this time. Given today's general concern about companies carrying high debt levels, it is important to note that our leverage, based on book value metrics is not representative. Our net debt to total book capitalization is 66%, but this is based on the historical value of our assets through Teekay Corporation. Whereas if you measure our net debt against today's fair market value of our fleet, our leverage drops to a relatively conservative 42%.

Turning to slide 12, Teekay Tankers has a very attractive debt profile with minimal principal repayments over the next five years. Based on our current drawings, our first material repayment is not due until 2013.

Turning to slide 13, our debt is light on covenants, which provides significant flexibility at a time when the credit markets are very restrictive. Our primary financial covenant is to maintain a minimum liquidity level defined as cash and undrawn revolving credit facilities and with our ample cash and undrawn revolvers, we do not face any covenant concerns.

In light of credit concerns affecting other shipping segments today, it is very important to note that we have only one debt facility, representing $32 million, which has a minimum whole value covenant. Currently the value of the ships as it relates to the total borrowings available under these facilities is approximately 480% compared with the minimum requirement under the covenants of 105%. This means that vessel values would have to drop by some 80% from where they are today before our debt capacity under this facility is reduced.

Turning to slide 14, we show the updated charter profile of Teekay Tankers' fleet. We carefully manage the employment profile of our fleet to provide downside protection through a percentage of fixed-rate coverage coupled with access to the upside from the remaining fleet being exposed to the spot tanker market through the Teekay, Aframax and Suezmax pools. Depending on our view of the market, we will tactically adjust the percentage of fixed-rate charters just as we will vary the length or the average length of such fixed rate cover between one and three years.

Due to the deteriorating global economy, we have increased our forward coverage by recently entering into three-year charters on two of our Aframax tankers, the Kyeema Spirit and the Kareela Spirit at an average rate of approximately $30,000 per day. We believe that the flow provided by these charters enhances our risk reward profile in today's economic climate and provide better visibility of the level of future dividend payments.

On slide 15 we show the effect of our current employment mix. The box at the top of the slide shows that our estimated cash flow breakeven spot charter rate or TCE for 2009 is actually below zero. In fact minus -$730 a day. This means that we will be able to pay a dividend in any tanker freight market. The grid on the bottom of the slide shows our estimated Q4 2008 quarterly dividend payment based on a range of different spot charter rates for Aframax and Suezmax tankers.

Finally, turning to slide 16 before we open the call up for questions, let me summarize why we believe Teekay Tankers is well positioned in the current environment. We have a strong total available liquidity of approximately $75 million, a favorable debt profile with no near-term refinancing requirements, no covenant concerns and no requirements to raise public capital. And lastly, we have calibrated our tactical fleet employment to allow for better visibility during a period of uncertain economic outlook.

I would like to thank you for listening in today, and we would like to open the call up for questions.

(Operator Instructions) [Ted Lu], Merrill Lynch.

Good afternoon, and thank you for this opportunity. Several analysts at other firms have suggested that the poor market and dry bulk shipping might feed over to the tanker fleet. I just wondered if you care to comment on that.

Thank you for that question, Ted. There is a big difference between dry bulk and tankers. If you look at how demand can vary in the dry bulk space, the run up in dry bulk rates we've seen the last couple of years was based on very significant annual increases in demand. And as we've seen in the reversal of the dry bulk market, it can also move very rapidly the opposite direction.

The tanker space is very different because oil demand is actually somewhat predictable. It is maybe slightly negative year on year at the moment, but typically it grows between 1% and 2% annually. So with a bit of leverage factor around the distance where oil travels can vary a bit over from decade to decade. Generally tanker demand is pretty stable in its growth, and I guess the issue that drives the changes in the tanker business is as much the supply side as the demand side.

So the dry bulk is much more volatile, and the tanker space is much more stable. But I should point out that we are taking a view that it could become a little bit challenging in the next year because of the negative year on year oil demand growth in OECD markets. And so we are taking a conservative approach at Teekay Tankers by covering some more time charter but we are maintaining access to the upside. We still expect a reasonable winter market based on the typical seasonality. So we have an exposure to the upside, but we have protected the downside.

Thank you. Could I ask one short question?

Go-ahead.

Are you familiar with the LRAD device? It is a sound megaphone that can be directed for protection against pirates, etc.

Yes, that is a device that we are familiar with, and I think it is being used successfully in that type of situation. So, in fact, we are looking at those types of ideas. But thank you for pointing that out.

I was just curious. Thank you, sir.

Ken Hoexter, Merrill Lynch.

Thanks. This is actually [Seth Lowry] stepping in for Ken who is traveling. I was hoping to get an update on your outlook into the close of the year, as far as where you think the market is going to go? Are you still expecting a seasonal run-up in the magnitude of the last year? And along with that, can you comment on the incremental news flow and what you're hearing on vessels being laid up for storage, how big of that is going to be a factor towards the close of the year?

Okay, well, I think the current tanker market is moving a little bit sideways. The OPEC cut that took place about a month ago is beginning to have a bit of an effect and if OPEC were to cut again as there is some discussion they might, that would again potentially threaten to take the edge off the winter market. But tanker rates for Aframaxes are sort of in the mid-20s, mid-to high 20s. And for Suezmax in the mid-to high 30s. So by historical standards still at reasonable market.

Obviously if you look a bit longer term what is going to potentially drive the return of oil demand, the low oil price that we are seeing now should potentially begin to reverse some of the demand disruption that has been seen in the oil side. But that could take a while. So if you look immediately to the fourth quarter, the winter market, I would say we are looking at a reasonable market, but with OPEC cutting back and likely to cut again, I don't think we should expect a big spike this winter.

Okay, just.

On the storage side, I don't have any data right now to indicate there is any significant storage activity. But it's an interesting point. We normally pick up if there are any big moves but in times when Middle East OPEC countries are trying to stem the flow of oil to end-user markets, it does make sense for them to maintain production for practical reasons but try to maybe find a way to store the oil. So we will take a look at that but it hasn't surfaced yet.

Okay and then with that outlook how big of a factor was that in the decision to put the two vessels on contract or was that more outweighed by the benefits from increased visibility?

I think it is a matter of a balanced approach. We think this is important that we create some visibility in a period of uncertainty, we feel, and so we do have an exposure to spot market. So if we do get a spike, which is certainly possible over the winter you can get dislocations due to weather and due to nighttime navigation and so on. But we also do have one vessel running off early into 2009. So we just renewed a bit ahead of the curve and lengthened out some of the terms.

So it is all part of a tactical fleet management, and I think this is where Teekay Tankers benefits from its association with Teekay Corporation because Teekay Corporation has the relations with major oil companies, to be able to enter longer-term charters when we are looking for it.

Great. Thank you.

(Operator Instructions) Justin Yagerman, Wachovia.

Good morning, guys. This is Mike Webber filling in for Justin. How are you? Just a couple quick questions. First on a chartering basis and maybe even give a little bit more color on this. You've got the [Nero] Spirit rolling off the first part of this year and then the Nassau Spirit with an option, that looks like it rolls off the end of Q2. How do you think about chartering that is going forward? Obviously some of them probably put towards the TK pools, and is there any dialogue going forward about that option possibly getting picked up on the Nassau Spirit, and just some general color on chartering.

I would say I think the market is sort of in a bit of a holding pattern. As I said, day rates are reasonable without being necessarily having a lot of fireworks in them. So I think we are expecting sort of a fairly stable or tight winter market. And we are prepared and pleased to have some exposure to that. As far as the Nassau Spirit extension, that charter is a little unusual in that it has both put and a call.

So if Teekay Corporation does not call for the one-year extension in the high 30s, then we can put that vessel to Teekay in the low 30s. So I guess that will be weighed when that option becomes due. And in general I think it is locking in the coverage around $30,000 a day gives a pretty reasonable dividend. So I think we have to weigh the risk reward given the volatility in the world economy; I think it is prudent management. I think we are serving shareholders well by ensuring we can pay a dividend in any market.

Great. And that 45% operating the spot market through both Teekay's Aframax and Suezmax hulls, is that a pretty solid I guess run rate going forward when we think about the interplay between your spot exposure and your charter coverage?

I would say, I would view that when we see the risks as being a bit higher than normal we would seek a higher percentage cover sort of in the 40% to 60% coverage; or 50% to 65% coverage. And maybe when we think that the outlook is particularly positive we might try and reduce that to a lower number.

Okay, great. I guess my last question just around some of the piracy stories that have been pretty fascinating to follow, given I guess the general increase in ton mile that these kinds of stories create is as operators tend to avoid those regions. How do you think about that story and that phenomenon impact on your ability to drive some sort of premium above published spot rates? When you guys are triangulating vessels and when you are actually operating them in a spot market or when the Teekay pools are?

I guess the point that you bring up is the fact that generally the piracy is a serious issue and one that thankfully is getting a lot of media attention now. We are supporting the International Tanker Owners Association as much as we can because we need this problem to be addressed, and we have been influential with a different number of different navies and NATO and so on, the EU. But essentially there is the possibility I mean you are seeing more and more ship owners directing their vessels to go south of Africa, and you are seeing certainly longer deviations around the coast of East Africa on ships.

So I think -- and it could also have vessels that choose to go through Gulf of Aden. Some of them are waiting for convoys which could take a number of days. So clearly it creates inefficiency, and therefore potentially drives up or drives down effective supply of tankers. Or drives up demand depending on how you view it. And that is very true of a lot of things I guess the whole supply chain and tanker business is very geopolitically driven. And it doesn't take a lot of disruption really to create the spark that can trigger a run-up in rates. We've seen that in past years and I think we will see that again if you have any disruption on any scale.

Can you give a specific example or maybe some color on how you would capitalize on that dislocation and that increased ton mile, as far as some of these vessels that are operating in the spot market within these pools? I know where they are at has an impact on the timing of specific routes or vessel migration or something along those lines?

If you took a supertanker, 2 million barrel vessel that is trying to carry a load of oil from the Middle East to, say the United States, you would either go up through the Red Sea and unload part of the cargo, go through the Suez Canal, reload and proceed on to the States, or you could go around the Horn of Africa and get to the States that way. You would typically increase the voyage length if you did that on both legs by something like 40%. So that is a dramatic change. So that's I guess it would simply be the cumulation of vessels taking extra days to deliver the same amount of oil would artificially I guess reduce the effective supply of ships.

But outside of just the general ton mile increase is there any ability to reroute vessels more efficiently to take advantage of the dislocation in that specific area? Outside of a general constraining of supply as they take longer to avoid those regions?

I'm sorry I don't see that, but I guess effectively the primary concern is the safety of our seafarers. So we take the precautions we can, and if you are asking whether we would be willing to trade in areas others wouldn't be willing to trade, for example if that is what you are getting at, then that is not our strategy. It is not to take on the most risk. So I think it's an industry issue. The industry is reacting, and so are political and military groups. And we hope that this can be stamped out, but if not it potentially will create an upward bias in tanker rates in my view.

I appreciate your time. Thanks, guys.

Sandy Goldman, Hartline Investment Corporation.

Thank you. You've commented that your net debt to fair market value is 42%-odd. What is the market today for vessels? How much is salable? Are their transactions being affected?

It has gone quiet, but we have recently sold at the Teekay Corporation level, we've recently sold a modern Suezmax tanker for just under $100 million, which indicates a decline in vessel values from the peak of 10% to 15%, and there is not a lot of transactions, which suggests that buyers are not queuing to buy ships at these levels. So we would expect that prices may continue to fall. How far is difficult to say, but we certainly don't expect the kind of collapse that you've seen in dry bulk vessels, which is simply where the demand has just completely evaporated for those ships.

The world's oil, whether it is 85 million barrels a day, 86 or 84 million barrels a day, the delta for demand for tankers is not great, and therefore the values of tankers in our view is not likely to see very dramatic changes. But there will probably be a downward trend in values for the next little while as the world economy looks out.

And also, the other thing with the cost of debt and the difficulty in accessing debt, you can't apply as much financial leverage in typical ship transactions as you had in the past. And so the price of assets would automatically probably recalibrate partially if the potential buyers can only raise a lower amount of debt and more expensive debt. So it is going to be a bit of a self-fulfilling prophecy in that regard.

How is this impacting shipyard availability space and the opportunity to buy vessels if one wanted to, if the future at lower prices, build vessels, excuse me?

Yes, I think the shipyards have filled up their orderbooks for three to four years with a variety of ships, tankers, dry bulk containers, gas, offshore. What we are seeing now is you couldn't go out and try and order a vessel with sort of less than three years leadtime at this point. But a number of the ships on order and probably in particular in dry bulk and tankers, a large percentage of the ships that are on order have been placed with relatively new shipyards, including in Korea and China.

And there are already anecdotes floating around the market of orders being canceled because of lack of financing. And some of these shipyards are very inefficient, so they are running behind schedule, opening up an opportunity for buyers who see their orders now out of the money to turn around and cancel. And I think a number of the yards will never get built. Others may end up building the vessels, but with much delay so that the inflow of tonnage as projected by industry analysts may actually be lower in the next several years than what you see at the headline number.

So if you want to look for bargains, then you may have to wait a while because the shipyards are having a nice full belly. But that could change.

Are any of the shipyards beginning to look like they are going to have to close for financial reasons?

It looks to us as if some of the Chinese shipyards and smaller independent Korean yards are not in great shape, but the major yards will likely pull through because they have a very efficient process. And so but we think that will certainly take the edge off new construction, and that will be self-regulating on the prices.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I will turn the call back to Mr. Moller.

Thank you very much for joining us, and we appreciate your support. Please enjoy a peaceful Thanksgiving, and we will talk to you soon. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line, and have a great day.