Teekay Tankers Ltd (TNK) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Teekay Tankers first quarter 2010 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'd like to turn the call over to Mr. Bjorn Moller, Teekay Tankers President and CEO. 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 first quarter earnings presentation. Mr. Moller 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 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Thank you, Kent and hello, everyone. Thank you very much for joining us. With me from Teekay Tankers here in Vancouver is Vince Lok, Chief Financial Officer, and joining us are also Peter Evensen, Executive Vice President, and Brian Fortier, Corporate Controller.

This morning we are reporting on Teekay Tankers results for the first quarter of 2010. And I'll begin with slide three of the presentation with our recent highlights. I am pleased to report that the Company today declared a quarterly dividend at the top end of our previously released guidance for Q1 of $0.37 per share, up from $0.26 per share in the prior quarter. This dividend is payable on May 28th, 2010. During the quarter our spot Aframaxes earned an average TCE of $17,624 per day and our Suezmaxes earned $32,032 per day. For the quarter we earned adjusted net income of $6.4 million or $0.20 per share.

In April of this year we completed a series of transactions acquiring three modern vessels and selling one older Aframax with a combined impact of these transactions increasing our illustrative dividend by approximately 15% and increasing our financial strength by using a grades of percentage of equity to finance the acquisition. I will provide further details of this increase later in the presentation. I will also speak to the tanker market in general and try to provide some insight into the relatively strong rates currently being enjoyed by our spot trading fleet.

Lastly, we recently completed a new time chart for one of our Aframaxes upon the expiring of its current time charter. With this new charter commencing in August, we'll have a rate of $18,300 a day for a period of approximately 14 months.

On the next few slides I'd like to highlight a few key points from the recent accretive transactions completed by Teekay Tankers. Turning to slide four of the presentation, we acquired three modern vessels, The Yamuna Spirit, Kaveri Spirit and Helga Spirit from our sponsored TK Corporation for a total price of $168.7 million. Two of the vessels are in time charters to substantial counter parties increasing the amount of fixed rate cash flow we generate to support our dividend. And the third vessel, the Kaveri Spirit, is trading in the spot market.

We also sold an older 15-year-old Aframax tanker, the Falster Spirit, for an attractive price of approximately $17 million and used the proceeds to repay debt. All told we expect these transactions together with the associated equity raise completed in April to increase our illustrative dividend run rate by approximately 15% as I will detail on a later slide. A further positive effect of the sale of the Falster Spirit is that we no longer need to complete a scheduled expensive drydocking of this ship resulting in incremental cash available for distribution. Additionally none of the new ships need to be drydocked until 2012 thus the drydock reserve will not be increased due to the acquisition.

Turning to slide five, in addition to being accretive, these transactions also significantly increased our financial strength and profile. The fixed rate charges on the Yamuna Spirit and the Helga Spirit plus the [natural] Spirit charter have increased the percentage of our fleet trading under fixed rate time charters for the rest of 2010 from 55% to 60%. We feel that this is an appropriate level of fixed rate coverage as it helps to offset some the rate volatility which might occur throughout the rest of this year.

We expect our financial leverage, as measured by net debt to capitalization, to reduce from 59% at March 31 to approximately 45% at the end of the second quarter. This substantial strengthening of our financial position was made possible by the successful public offering completed in April and the concurrent $32 million of equity contributed by our supporter sponsor TK Corporation.

Our financial liquidity also rose as a result of these transactions increasing by approximately $100 million from $135.9 million at the end of March to approximately $235 million. With the acquisition of these three ships, we were able to assume very attractive financing that had been prearranged by our sponsor. This preferential financing does not require any payment now until 2016 due primarily to the amount of equity raised in connection with this acquisition leaving a significant portion of this facility as undrawn.

Looking at slide six, we have updated the picture of our current fleet employment profile and updated the percentage of fleet trading under fixed rate charges for the recent acquisition and other fleet changes. As just mentioned, we now have approximately 60% of our 2010 operating days fixed with the remaining 40% still exposed to the spot market. This percentage is even higher for the second quarter with 71% fixed due to the timing of when the contracts expire.

Turning to slide seven, we have updated the slide we presented last quarter for the recent acquisitions and sales and extension of the charter of one of our Aframaxes. It is a busy slide, but the key takeaways are shown in the three bullet points at the top of the slide. Our 2010 fixed rate revenues are now so substantial that they exceed all of our costs and reserve environments by approximately $0.31 per share annually. Those $0.31 plus all of our spot revenues can therefore be paid out to shareholders. The details can be found in the per share column on the right-hand side of the slide where you can see that our 2010 locked in fixed rate revenues amount to $1.90 per share, deducting our expenses and reserve items leaves us with a distributable cash flow floor before any revenue contribution from our spot fleet of $0.31 per share.

Using again as an illustration only the earlier example of average spot rates of $15,000 and $20,000 per day for Aframax and Suezmax respectively, the spot fleet would contribute an additional $0.73 per share leading to a derived dividend figure for 2010 of $1.04 per share, $1.04. This is an increase of approximately 15% from the $0.90 we would have been able to pay prior to the recent transactions.

Looking at slide eight, we illustrate the current operating leverage from our spot traded fleet with the red dotted line and compared to the operating leverage before the recent vessel transactions shown by the solid blue line. Starting from the revised illustrative base dividend of $1.04 per share, we have projected the dividend on the various spot rates scenarios. Our illustrative dividend increases along the dotted line by our current operating leverage which is $0.22 per share per year for each $5,000 a day increase in spot TCE rates. And next to the vertical axis we've also shown the dividend yield that corresponds to the various levels of dividend payments using our current share price.

Unlike the purely illustrative slides I have just walked you through, the matrix on slide number nine provides our actual Q2 2010 guidance on dividends. For the quarter to date we have booked approximately 50% of our Aframax and Suezmax spot revenue days at $17,000 and $29,000 per day respectively. These rates are now being exceeded due to a firming spot market with Clarksons' reporting current rates of $20,971 a day for Aframaxes and $40,652 per day for Suezmaxes. It is uncertain how long these higher tanker rates will hold. Nevertheless, as you can see from the matrix, we are likely in line for another attractive dividend payment for Q2.

On slide number ten, you can see that spot tanker rates for crude tankers have been on the rise since last August driven by strengthening market fundamentals. Encouragingly rates in Q2 to date have been relatively firm during what is usually the seasonally weakest quarter of the year for oil consumption. On the larger crude tankers the ton mile incentive movements to China coupled with floating storage in the Atlantic and off Iran have supported rates, although they are off their recent peak levels. This week's strong [Riley] and Aframax rates in the Atlantic appear to be driven by rising cargo volumes in the North Sea and increased transatlantic cargo movement due to higher US refinery utilization.

On slide 11 we discussed the oil market fundamentals underpinning the spot tanker market. Oil demand growth in 2010 is forecast by the IEA to be the strongest since 2004 on the back of the global economic recovery. Once again, this demand growth is expected to come from nonOECD led by China. China's crude imports are running 16% ahead of 2009 and are being sourced from ton mile incentive OPEC and Atlantic basin suppliers. Importantly, however, oil demand in the OECD has finally stabilized after two years of negative growth, and this removes a major drag on tanker demand.

OPEC quarter compliance continues to slip. OPEC production in April 2010 was nearly one million-barrels a day higher than the same month last year and has been a major driver behind tanker demand growth. Looking at the second half of the year, the call on OPEC crude is expected to be higher as global oil demand increases seasonally.

Turning over to tanker supply on slide 12, the impact of the IMO targeted single hull tanker scrapping is now evident as tanker removals have risen considerably compared to 2009 as shown in the top chart. The news for single hulls is tightening further as Thailand, which is the second largest spot charter of such vessels, recently announced that it is considering a ban on single hull ships.

Also, the recent events in the US Gulf are likely to end the use of single hull tankers in the ship-to-ship [loitering] in US waters. It is telling that this past week Vela, which is Saudi Aramco's shipping arm, has reportedly sold five of the it's remaining single hull VLCC's for dry bulk conversion. As you can see in the bottom of the table year-to-date net fleet growth has been limited to only 1.5% due to slippage in the schedule of new buildings and the high rate of removals.

Finally on slide 13 we have updated our 2010 fleet utilization outlook slide. While not much has changed in the numbers from when we presented this slide last quarter, we have included it again mainly as a reminder of the plausible path that would take us at least part of the distance from the base case utilization of 86%, which would typically drive a mid-cycle type tanker market, to the recovery case which could ultimately see a return to full fleet utilization and higher rates. As these various factors play out, we do expect volatility to remain a feature for the rest of the year. In closing, we are pleased with the progress Teekay Tankers is making and we feel we are well positioned for the future. Thank you for listening in today and we look forward to your questions.

(Operator Instructions) Our first question comes from John Chappell with JPMorgan. Please go ahead.

Thank you. Good morning, guys.

Hi, John.

Just two quick ones for you. This is pretty straight forward story. The first one on the Teekay call you made mention that the returns aren't quite at your hurdle rates yet for acquiring ships. I'm thinking the cost of capital on TNK is a little bit different, are you closer to your hurdle rates on TNK or are they any different from Teekay where you might be closer to pulling the trigger on more growth in this entity before you would at the parent?

Right. Okay. Well I think the important for Teekay Tankers is that we have a valuable currency that allows us to acquire vessels using that currency. So we can acquire vessels on very attractive economics and this is the basis on which we've been able to achieve such significant dividend growth with this latest acquisition we made. So it's a very different situation based on the assets values, where they are and where our share price is.

And more attractive for TNK

Right.

Where we stand right now than for Teekay?

For Teekay future growth.

Okay. The other one just, maybe you have it or maybe Vince has it, just an update on timing of any drydockings, not as it relates to the costs because I know that you're smoothing that out, but just the number of off hire days for the next three quarters?

Yes. In the second quarter we have two vessels drydocking and we have one in the third quarter. Of the two ships in the second quarter, there is one lengthy drydock in there for one of the older ships, so off hour days are about 100 days in the second quarter, and that's built into our dividend table for the second quarter. And the one in the third quarter is a shorter one, probably about 20 days. And again as a reminder, there is no drydockings scheduled for 2011.

Perfect. And none in the fourth quarter?

None in the fourth quarter.

Okay. Thanks, Vince. Thanks, Bjorn.

Thank you, John.

The next question comes from Ken Hoexter with Merrill Lynch. Please go ahead.

Hi, guys, it is Scott Weber in for Ken today.

Hi, Scott.

Hi. Just general question, I mean when we're looking at the spot rates quoted by the brokers they're, for the Q1, they're about 10% to a little higher than what you guys actually achieved. Is that just a function of how a lag effect and how the rates have quickly moved since you put the ships on charter or what's that really attributable to?

And are you referring to Clarkson?

Yes, yes so if I look at Suez rates during the first quarter, Clarkson or one or two other sources I see about 36,000 to 37,000 versus your 32,000.

Yes, well that's a good question. The Clarkson numbers first of all are very helpful from a directional standpoint, but it should be borne in mind that they're theoretical numbers, so you-- they have different features and assumptions than necessarily those that occur in the real world. So I think they're mainly a tool to discuss the movement in rates and the direction of rates. So I think it's-- nobody achieves Clarkson numbers typically.

But there is also the lag effect that you described because we had a lot of volatility around the end of the quarter, and so typically the assessment made by brokers will change on the day where you experience the fixture, the voyage contract, where as the actual achievement or that revenue will occur three to six weeks later by the vessel. So it's a very -- it's a snapshot.

What we compare ourselves to is of course some of the futures trade routes or the different indices that are based on actual fixtures reported in the market, and we do very well against those indices. We also compare ourselves to our peer group and we generally outperform or certainly perform in line with the best operators out there. So I think we're very pleased with the performance of our team, and there will be some volatility that short term might look as if numbers don't match up.

Just a couple other factors. The Clarkson figures do not deduct commissions where as our TCE figures do. And secondly they don't take into account sort of idle days and off hire days. So one of the rules of thumb we use is you kind of take the Clarkson number and take about 90% of that to get to your TCE.

And lag it as well.

And lag it as well, yes.

Got you. That's helpful. And then just in terms of the charter coverages you see, the strengthening of rates here and it's been somewhat rapid, I mean do you-- what's your goal or what's your outlook in terms of the mix of charter and spot? Would you look to put any of the current spot fleet back on charter on a shorter term or how do you see that playing out over the next six to twelve months?

Right. It's a-- we actively manage this in a tactical manner where we try and judge the optimal mix, and I guess it's important that we -- and I think we benefited from the ability to create a stable flow under our dividend that has allowed us to pay out very attractive dividends even during weaker periods as you saw in the second half of 2009. And so of course time charter rates now are lower than some of the charters we have that are rolling off, so we want to kind of weigh that against where we see the spot market. So as you can see the 18,200 or 300 we agreed on the [Natural] Spirit is probably sort of a tactical conservative move to secure the flow, but we do have significant exposure as shown by the operating leverage graph of $0.22 per share for each $5,000 a day tanker rate move. And so we think this is a good mix but it may vary. As you can see into 2011 we have less coverage but we will again evaluate that as the year progresses and decide where do we want to be for 2011.

Okay. Terrific. Thanks for the time.

Thank you.

The next question comes from Matthew Troy with Citi Investment Research. Please go ahead.

Hi, guys this is [Basket Majors] in for Matt.

Hello.

On the order book I see that you've kept the cancelation assumptions consistent I believe with what you reported last time for the year at around 5% in your supply analysis. I was hoping you guys could give some color onto what drives that and directionally whether you're seeing anything change one way or the other on the financing side?

Right. It's-- there's not a huge amount of concrete cancellations being reported, but I think you can consider maybe that as a bit of a proxy for a combination of delays and cancellations that that will affect 2010. So I mean there is still a number of vessels that are looking for financing where the values are way out of the money compared to the new building contract. So we suspect there'll be workout situations coming up, whether that may lead to conversion of those builds to other types of vessel, that would be one possibility. But we're not seeing a lot of cancellations, so that may not end up occurring on any significant scale. So we have been relatively conservative in the number we're assuming.

All right. And to follow up an earlier question, you spoke about your stock being a valuable currency and enabling you to do accretive deals. Do you also have quite a bit of liquidity on the debt side already in place. Can you talk about what you may do and when and if the next deal comes around and as far as financing mix and whether that is likely to be another deal with Teekay or if you're willing to look at some of these workouts or external deals that you just mentioned? Thank you.

Peter, did you want to comment on that?

Yes, when we're looking at transactions, we looked at both at [Apateekay] assuming Teekay is willing to offer us some assets at fair market value as well as third party transactions. And we are pretty agnostic about which one we would choose. There aren't really that many-- well, there certainly aren't any distressed opportunities and there's only some stressed opportunities, so I think we'd prefer to go with our more conservative method of if we make an acquisition we would finance it with both equity and debt because we think that's more sustainable going forward. However, we do have low cost liquidity so we could use that if we were to acquire assets in-- as a bridging mechanism to finance it. And that's our model and we don't see any reason to really change it.

Thanks for the time.

(Operator Instructions) There are no further questions at this time. Please continue.

Okay, well thank you very much for joining us this morning Vancouver time and look forward to talking to you next quarter. Enjoy the rest of your day. Bye.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.