Teekay Tankers Ltd (TNK) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Teekay Tankers' second quarter 2010 earnings 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 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 second 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 second quarter earnings release and earnings presentation available on our website.

I will now turn the call over to Mr. Moller to begin.

Thanks, Kent, and good morning, everybody, or good afternoon in New York, I guess, and thanks for joining us. With me for Teekay Tankers in Vancouver is Mr. Vince Lok, Chief Financial Officer, Peter Evensen, Executive VP, and also Teekay Corporation's Corporate Controller, Brian Fortier.

This morning we are reporting on Teekay Tankers' results for the second quarter of 2010, and I'll begin with slide three of the presentation with our recent highlights.

The Company yesterday declared a quarterly dividend above the previously estimated range for Q2 of $0.34 per share, just down slightly from the prior quarter. This dividend is payable on August 27, 2010. During the quarter, our spot Aframax tankers earned an average TCE of $18,929 per day, and our Suezmaxes earned $30,942 a day. For the quarter we earned adjusted net income of $7.6 million, or $0.18 per share.

In April and July of this year, we completed a series of transactions that, on a combined basis, I expect it to increase our illustrative run rate dividend by approximately 30%, commencing with the third quarter's dividend. As a reminder, our illustrative run rate dividend assumes a spot Suezmax rate of $25,000, and a spot Aframax rate of $15,000 a day.

In the first of these transactions, in April and May we acquired three modern ships and sold one older ship, for a net investment of $154.5 million. Two of the ships are on fixed-rate time charters at attractive rates in excess of the current spot market. These vessel transactions increased our illustrative dividend by approximately 15%, and increased our financial strength, because we used a greater percentage of equity to finance the acquisition.

In July, we announced that we had invested in two three-year first priority ship mortgage loans, for a total of $115 million, to a large Asian-based ship owner, to partially finance two VLCC new buildings. The term loans earn interest at an annual interest rate of 9%, or 10% including the repayment premium feature. We financed the loans using a portion of our undrawn facility, which bears interest rate-- interest at a rate of LIBOR plus 0.6%.

Since we last spoke to you at the time of announcing this transaction, we have fixed a portion of the interest rates on the associated debt financing, at an all-in interest rate of approximately 1.6% for a period of 2.4 years. We expect these loans to increase our annual dividend by approximately $0.20 per share during the three-year term of the loans.

I won't speak further on these transactions at this time, because we previously released individual presentations when they were announced. However, should you have any further questions, please feel free to ask them during the Q&A portion of today's call.

Finally, I will speak to the tanker market in general, and try to provide some insight into the current weak rates and to our more positive outlook for the upcoming winter market.

Looking at slide four, we have provided a picture of our current fleet employment profile, and updated the percentage of fixed rate coverage for the two transactions I spoke about on the previous slides. Two of the three ships acquired, the Helga Spirit and the Yamuna Spirit, are trading on fixed rate charters. And we consider the two loans we made in July as being the equivalent of two ships trading on three-year fixed rate bareboat charters. In total we have 66% fixed coverage for the second half of 2010, and 43% for 2011.

I believe a good way to summarize the strength of our fixed rate portfolio is to consider that over the next four quarters, we expect that our fixed rate revenues are substantial enough to exceed all of our costs and reserve requirements by approximately $0.13 per share. This means that those $0.13, plus all of our spot revenue, can be paid out to shareholders.

Looking at slide five, we illustrate how our recent transactions have raised the dividend flow, shown by the upward shift in the annual dividend payment from the dotted blue line, which applied before the transactions, to the new solid red line after the transactions. In addition, the slope of the red line highlights the significant operating leverage from our spot trading fleet, starting with-- from the revised illustrative base dividend of $1.20 per share. Again, our illustrative base dividend assumes spot Suezmax rates of $25,000, and spot Aframax rate of $15,000 a day. We have projected the dividend onto various spot rate scenarios. Our illustrative dividend increases along the solid line by our current operating leverage, which is $0.30 per share per annum for each $5,000-a-day increase in spot TCE rates.

Next to the vertical axis, we have also shown the dividend yield that corresponds to various levels of dividend payments, using our current share price. Unlike the purely illustrative slides I've just walked you through, the matrix on slide six provides our actual Q3 2010 guidance on dividends. For the quarter to date, we have booked approximately 50% of our Aframax and Suezmax spot revenue days at $13,500 and $19,000 a day, respectively. Spot rates have continued to drop, and are currently below these levels, but fortunately our substantial fixed rate coverage helps insulate us from the full effect of this market weakness, ensuring our ability to maintain an attractive dividend.

As I'll discuss on the next couple of slides, we're expecting tanker demand to pick up in the upcoming winter, assuming we experience a normal seasonal demand pattern. Turning then to slide seven, we examine some of the factors which explain the recovery in global oil demand and the resulting relatively firm tanker rates in the first half of 2010.

Global oil demand goes hand-in-hand with the world economy, with an 83% correlation between the two over the last few years. The current projection from the IMF is for 4.6% growth in the global economy during 2010, with emerging and developing economies leading the way. As a result, local oil demand is expected to grow by 1.8 million barrels a day, or 2.2% in 2010, the highest level of oil demand growth since 2004, and reaching a new all-time record level.

The outlook for both the global economy and the oil demand has become progressively brighter over the past year. In April of last year, the IMF was projecting total global GDP growth of just 1.9% in 2010, as the global economy was expected to recover very slowly from the financial crisis. However, the recovery has been much more rapid than expected, and the IMF has raised its outlook for economic growth in 2010 in every subsequent update. Similarly, the outlook for oil demand growth has improved over time. In July 2009, when the IEA first released its 2010 oil demand outlook, the forecast was for 1.4 million barrels a day growth. In its latest assessment, the IEA is calling for 1.8 million barrels a day growth, an increase of 30% from its initial forecast. The IEA has also recently released its first estimate for 2011, to oil demand growth at 1.5%.

Turning to slide eight, we look in a little more detail at the near-term tanker demand dynamics. Crude oil imports into China in the first half of the year increased by 30% over the same period last year, with Chinese tonne-mile demand growing even faster as China continues to source its crude oil from further afield in the Atlantic basin. Angola remains the number one supplier of crude oil to China, and imports from South America have also increased substantially year-on-year.

US oil demand stays to recovery up 2% year-on-year in the first half, and while there remains some question about the strength of the global economic recovery, looking ahead to the winter, the chart on the top left highlights the firm outlook with winter oil demand forecast to be at its highest level in three years. In the short-term though, floating storage of oil, shown on the bottom chart, has declined due to the erosion of the Contango oil price play, as well as the unwinding of the Iranian storage program. Storage vessels returning to spot trading-- we have seen a one-time increase in tonnage supply, and this is what has hurt tanker rates in the third quarter to date.

Having looked at the demand side, slide nine examines what has been happening to the tanker fleet in the year-to-date. In the first half of 2010, the global tanker fleet grew by around 12 million dead-weight tonnes, or 2.8%, compared to 24 million tonnes, or nearly 6%, in the same period last year. The slow-down in tanker fleet growth is largely due to an increase in removals, particularly vessel scrapping, as a result of the IMO phase-out of single-hull tankers, which is coming into effect in earnest this year. In addition, we continue to see a relatively high level of slippage in the tanker order book, with deliveries running about 25% behind schedule in 2010 to date.

Looking ahead, we expect tanker fleet growth to come in at approximately 5% in 2010, down from 7.1% last year. This slowdown in fleet growth, when combined with a stronger demand picture, again helps to explain the relative strength in rates during the first half of 2010, compared to the low levels of last year.

Before we open up the call to questions, I'd like to turn your attention to slide ten, which provides some preliminary details on our 2010 Investor Day, to be held on Wednesday, October 20 at the Waldorf Astoria Hotel in New York. At this event, we'll provide a detailed presentation on the Teekay group of companies, covering the financial position and market outlook for each of Teekay Corporation, Teekay LNG, Teekay Offshore, and Teekay Tankers. The event will be webcast live for all interested current or prospective investors. And while this is still a couple months off, we encourage everyone to mark their calanders, and look forward to presenting and meeting with investors.

I am now available to take questions. Thank you.

(Operator Instructions) Your first question comes from John Chappell of JPMorgan. Please go ahead.

Thank you. Good morning. Vince, on the dry docking days, you've highlighted a lot of the dry docking for Teekay Corporation in the earlier call. Was there any in the second quarter that impacted Teekay Tankers and what's the schedule for the second half of this year?

Yes, second quarter actually was a higher than normal level of dry docking for Teekay Tankers. So we had two ships dry dock for a total of 94 days. In the third quarter, a little lighter. We had one vessel for just under 20 days. And nothing scheduled for the fourth quarter and nothing scheduled for 2011.

Okay.

We've gotten through the heavy dry dock schedule in the second quarter already.

Do you mind saying what ship that had the Erik Spirit in the second quarter and--

The second quarter was the Sotra Spirit and the Erik Spirit and the third quarter is the Matterhorn Spirit.

Perfect. Okay. And then a similar question on this-- on the deal you announced a couple of weeks ago with the debt structure. This whole repayment feature that can bring it to 10%, is that something that should be assumed as kind of the base case? Is it already set up, so there's going to be this repayment premium that you're going to get 10%, or is that only potential upside and 9% should be the base case we use?

Well it should be 9% on a run rate, but when the loan is repaid, it'll turn out to be a 10% annualized return minimum. So it'll come -- if it -- on a three-year maturity, you could figure where we'll get 9% for two years and then we'll get 13%.

Okay. That's helpful. And then finally, just on TNK's potential fleet growth in the second half of the year, you said that from Teekay's perspective, you don't quite think the return to their per asset prices, clearly the cost of capital is a little bit different at TNK. Are you happy with the fleet where it sits right now and your outlook for the market and for asset prices, or would you expect some more fleet growth in TNK, let's call it in the next six months?

I believe we should expect to see an ongoing measured growth in TNK and we'll be opportunistic. I think that there will be some attractive opportunities, so I would hope we can grow TNK, that's certainly the plan.

Okay. Thanks, Bjorn, thanks, Peter and thanks, Vince.

Thank you. Your next question comes from Justin Yagerman of Deutsche Bank. Please go ahead.

Hey, guys. When you think about acquisitions coming up, I mean is there a preference between drop downs or third party purchases? When I think about buying vessels at potentially low asset prices and taking advantage of that type of a market, maybe you'd be more inclined to go out to third party as opposed to compensating the parent at lower levels, or is that not a consideration?

From a tanker standpoint, there's no consideration, it's a completely level playing field. TNK will look at assets whether they come from the parents or from third party on the same basis, and that is very clear, we're very deliberate about that. So I think it depends where the best transactions can be found.

When you look at the composition of your current fleet, would you think about going up or down in size, or are we going to be focused on the Aframax and the Suezmax's? And then I guess between the two asset classes, is there any inclination towards one versus the other?

I would say no. I think that by the time TNK has grown in the next several years, I think you'll find that TNK will be engaged across the spectrum of tankers.

Okay. Ships coming off charter in the back half of this year and early next, what are your thoughts? Obviously you guys laid out some to demand drivers, should we expect to see a mix of time-charters and some vessels left on spot, or what kind of employment are you considering right now, and how far in advance would you consider doing time-charters?

Yes, we are very focused on the tactical management of the fleet, and I personally believe that a mixture of spot and fixed will be in the best interests of our shareholders. We are -- we are playing it based on near-term developments, and the time-charter market moves, the spot market moves and if you acquire assets, sometimes they come with a coverage. So I think it's 43% I think is the number for 2011. It's all right a pretty good base, and we might still see some choppiness, so we will want to have some exposure to the upside. We ideally like deals that have [flow rates[ with profit share as we've been able to negotiate on a number of our charters. That's something that we like a lot.

When you look at the market right now, what's the depth of the time-charter market? Are you seeing longer term deals? Or is it really just one year and possibly even shorter? And where are the rates relative to spot?

Yes, so tanker rates for time-charter have certainly held up better than the spot market. But just today, I think we're seeing the spot tanker rates for Aframax in the North Sea jump significantly. So I obviously the volatility in the spot market means that these charters can be in and out of the money very quickly. There is not a significant traffic or the volume of deals beyond one year is pretty thin, but you can find selectively deals, if you wish. So it's a market that's been pretty active, I'd say, the last three or four months.

Okay. That's helpful, and then lastly--

I would just add, Justin that what we've been seeing on the time-charter market is a lot of people, oil companies, have wanted to take charters, but on market-related basis. In other words, floating.

Right.

And that doesn't -- and we're interested in fixed rate time-charters when we do time-charters, and because we feel we can outperform a market-related index. It's our pool structure. So we haven't been attracted to that model.

That's that makes a lot of sense and that's helpful color. Thanks, Peter. Lastly, just a quick one. You talked about swapping out part of the debt exposure on the VL transaction. What -- how much of that debt did you swap out? Is it the whole $115 million, or --

Yes, it's the entire $115 million, although we did a portion of that for two years, and another portion for three years. So the weighted average is 1%, so the all-in debt cost is 1.6% on that.

Got it. All right, thanks a lot for the time, guys, appreciate it.

Thank you for your questions.

Thank you. Your next question comes from Ken Hoexter of Merrill Lynch. Please go ahead.

Hi, guys, it's Scott in for Ken. Most of my questions were answered, but just curious, when you look back at having announced the investment in the two VLC loans, have you seen more of the same type of opportunities across your desk since then? And was that an isolated opportunity because of a relationship, or are you actively out there seeking other distressed investments like that?

Well, we have -- speaking for all the companies, but not for -- and not for Teekay Tankers, we've been really actually surprised at the reverse inquiry after we announced that transaction. A lot of new people have come to us. But that is not a transaction we would especially see down at Teekay Tankers. That's something we could look at some of the other companies. But it only pointed out to us that there is a shortfall of debt finance in the tanker market right now, and actually across the shipping spaces. The shipping banks have been sort of more impacted by the financial issues, and especially the European banks who don't have a natural source of US dollar funding. So actually we're somewhat surprised about that.

But our basic view at Teekay Tankers is that we want to own and operate ships, and so that's where you're going to find our sweet spot. We haven't deviated from that. This one was just such a good opportunity, we felt, and it put us into the VL market.

Sure. Okay. And then just a macro-based question, I mean in going back to that release when you made the investment, you mentioned that they provided an attractive risk adjusted return, and I think it's pretty clear why that is. But when you think about growth right now in terms of adding vessels, can you comment on where you see the risk? Do you see the risk coming more from the demand side, or from the supply side? Or is there a sense that vessel values have gotten ahead of themselves where we -- given where we are right now from a rate standpoint?

I think you have to look at two aspects. If you look at the pure upside-downside issue around vessel supply and vessel prices, I think that you have a large order book for 2011, and you have to expect that there will be some -- a little bit of indigestion on some of that tonnage, even though our demand is expected to grow further. But on the other hand look at Teekay Tankers standpoint, we have available currency that gives us the opportunity to make attractive investment. And so I guess we have a slightly -- the flow is tilted a little bit in our favor.

Sure, okay. Terrific, that's helpful. Thanks a lot, guys.

Thank you.

Thank you. (Operator Instructions) There are no further questions at this time.

Okay. Well, thank you very much for joining us and for your questions. And I hope to see you at our investor day in October, and we'll talk to you again in November for the third quarter call. Have a great day. Bye-bye.

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