Teekay Tankers Ltd (TNK) 2010 Q3 法說會逐字稿

Welcome to the Teekay Tankers Limited third quarter 2010 earnings results conference call. (Operator Instructions). Now for opening remarks and introduction, I would like to turn the call over to Mr. Bjorn Moller, Teekay Tankers, President and CEO. Please go ahead, sir.

Before Mr. Moller begin, I would like to direct all participates to our website at www.teekaytankers.com where you will find a copy of the third quarter earnings presentation. Mr. Moller, and Mr. Chan 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 third quarter earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Moller to begin.

Thanks a lot, Kent. And hello, everyone. Thank you for joining us. With me here in Vancouver is my successor is Teekay Tankers CEO, Bruce Chan, we also have Vincent Lok who is Teekay Tankers, Chief Financial Officer; Brian Fortier, Corporate Controller of Operations and by phone Peter Evensen, Executive Vice President. I thought I would turn it over to Bruce to lead us through the third quarter presentation. Bruce?

Thank you, Bjorn. Good morning, everyone. This morning we are reporting on Teekay Tankers's results for the third quarter of 2010. I will begin on slide three of the presentation with are recent highlights. The Company today declared a quarterly dividend within the previously estimated range for Q3 of $0.31 per share, down just slightly from the prior quarter.

This dividend is payable on November 30, 2010. During the third quarter, our policy of tactically managing the fleet between spot and short-term charters was a real benefit to our shareholders, as it allowed us to pay a dividend in line with last quarter even though spot tanker rates were down approximately 45%. Over two-thirds of our fleet was booked at an average time charter rate of approximately $26,000 per day, while our spot ships, which represented about one-third of our fleet earned approximately $10,000 a day loss or $16,500 per day.

For the quarter, we earned adjusted net income of $5.8 million or $0.13 per share. As I mentioned at our recent investor day, we received an offer from Teekay to acquire two ships and their associated financing. I am pleased to announce today that we have agreed to acquire these ships after completing our due diligence, including consideration by the conflicts committee, which is made up of independent directors.

This acquisition is expected to close by mid-November and I'll review some of the details of this transaction on the next few slides. I'm also pleased to announce that we have entered in to a two-year time charter at a rate well in excess of the current spot market on one of our existing Aframaxes that have been previously trading spots. With this new start charter, and the ship acquisitions I have spoke about we have approximately 70% of our fleet (inaudible) time charters for the full quarter, and approximately 50% next year.

(Inaudible) earnings release that did not include these charters (inaudible) for 2010, the 70% reflects these new charters versus the 60% in the earlier version. We have agreed to sell the 1995 Sotra Spirit, the oldest vessel in our fleet, for $17 million. Although the spot tanker market has remained week in Q4 to date, we have seen a seasonal upturn in VLCC rates during the past week. Seasonality is likely to positively impact Suezmax and Aframax rates as well.

On the next few slides, I would like to highlight a few key points from the recent acquisition completed by Teekay Tankers. Turning to slide four of the presentation, we acquired two modern vessels, the Esther Spirit and the Iskmati Spirit from our sponsors Teekay's Corporation for a total price of $107.5 million. The Esther Spirit is on time charter to a state-owned Chinese shipping company, and a Iskamti Spirit is trading in Teekay's Gemini Suezmax pool.

We will fund this acquisition primarily with proceeds from our recent $100 million follow-on equity raise. With the small difference being funded by our revolving credit facility. We believe this acquisition has many benefits. It allows us to grow our fleet, enables us to maintain 50% fixed coverage for 2011 and allows us to deliver the balance sheet from 55% to 49% a drop of 6% as calculated on a net-debt to capitalization basis.

The increased financial strength and flexibility arising from this acquisition provides us with significant capacity to grow , should attractive opportunities arise in the future. Expanding on the financial benefits of this transaction on slide number five, not only will our leverage decrease, our financial liquidity increases as a result of this transaction as well. We expect liquidity to increase by approximately $93 million, increasing our total available liquidity to approximately $213 million. The increase is due to the transfer of attractive financing, including undrawn revolver capacity that was prearranged by our sponsor, Teekay Corporation.

The Esther Spirit comes with $42.5 million of undrawn revolver room and the Iskmati Spirit comes with $58 million, both priced at LIBOR plus 0.6%. Currently LIBOR today is approximately 0.3%. Importantly, at our present level of outstandings, we do not have to make any principal payments on our revolving credit facility until 2016. Turning to slide six , we have provided an overview of our current fleet employment profile and updated the percentage of fixed-rate coverage for the two transactions I spoke about earlier.

Notably, one of the two ships acquired, the Esther Spirit is trading on a fixed-rate charter while the Iskmati Spirit adds to our spot-traded fleet. We have also been able to charter another of our Aframaxes tankers, The Matterhorn Spirit for a period of two years. If we consider the two loans we made in July as being the equivalent of two (inaudible) on three year fixed rate bare boat charters, we have approximately 70% fixed cover for the rest of 2010 and approximately 50% in 2011.

On slide number seven, we have illustrated how or dividend stability benefits from our fixed-rate portfolio. Based on our existing feet employment profile, we expect that our fixed-rate revenues will amount to $1.65 per share, which exceeds all of the cost and reserve requirements for the entire fleet, time chartered and flat traded, which totaled approximately $1.35 per share.

In other words, we will be able to pay out approximately $0.30 per share plus any spot revenue we earn to shareholders. Assuming illustrative average annual spot rates, of $15,000 per day for Aframaxes tankers and $25,000 per day for Suezmax tankers, this would provide an additional $0.87 per share, enabling us to pay an illustrative four-quarter dividend of $1.17 per share.

On slide eight, we have provided our dividend sensitivity under various tanker rate scenarios. The slope of the red line highlights the significant operating leverage from our spot-traded fleet, whereby we estimate an additional $0.27 per share increase to our annual dividend for each $5,000 per day move in spot tanker TCE rates. Next to the vertical axis, we have also shown the dividend yield that corresponds to various levels of dividend payment using yesterday's share price.

Unlike the purely illustrative slides I have just walked you through, the matrix on slide nine, provides our actual Q4 2010 guidance on dividends. For the quarter to date we have booked approximately one third of our Aframaxes and Suezmax spot revenue days at $10,000 and $13,000 per day respectively,which reflects the continued tanker market weakness experienced through October. While our substantial fixed-rate coverage insulates us from the full effect of this market weakness, we hope to see the season strengthening which typically begins around this time of year.

Over the past week, we have begun to see signs of market firming among VLCC's and as we will be discussing in the coming slides, we believe rates may yet strengthen over the winter for all tanker segments, which would provide further upside for future quarters dividends. Turning to slide ten, we can see that even though the spot tanker market is off to a weak start in the fourth quarter, we still believe that rates will be seasonably stronger during the winter months. Only twice, in the last decade has the winter market been weaker than the preceding summer. Both due to large one off events.

In 2001, tanker spot rate declines in the aftermath of the 9/11 terrorist attack, while in 2008 the market weakened due to global financial crisis. In the absence of these types of one-off events, we believe that normal winter market factors will come in to play over the coming weeks, and the recent strengthen of VLCC rates out of the middle east, could be an indication of tighter tanker market fundamentals starting to come in to play. The chart on the top left of the slide show that in recent years, the spike in rates usually occurred during the latter part of the fourth quarter.

The factors that drive a winter market rally, include the onset of winter/heating demand in the northern hemisphere, the return of refineries from seasonal maintenance, an increase in vessel delays, due to winter weather conditions and shorter delayed hours and the resumption of North Sea oil production following summer maintenance. On the bottom half of the slide, we look at the some of the short-term factors which have had an effect on the market in recent weeks.

Part of the reason spot rates weakened during the third quarter was the return to the fleet, vessels which were being used for temporary floating storage. As you can see from the chart on the bottom left, at present, just 2% of the tanker fleet is being used for storage, compared to 5% in the peak of November 2009. In addition, the tanker market has not benefited from Atlantic hurricane disruption this year, despite it being a relatively active storm season. With most hurricane systems bypassing oil and shipping activities in the US Gulf.

Disruptions caused by port strikes in southern France, gave some support to tanker rates in the Mediterranean during October, however the backlog of ships is now clearing. Turning to slide 11, we will take a brief look at the tanker market fundamentals for 2011. Our base case outlook is that 2011 will be a challenging year as fleet growth is expected to accelerate from 4.5% in 2010 to around 7%.

Fleet growth is expected to be particularly strong in the large crude tanker segments, while the Aframaxes have a more favorable outlook due to the fact that the peek of the order book is already behind us. In 2010, we are on track for the highest level of scrapping in 25 years. Combine ongoing scrapping with the lower level of new billing orders being placed in 2009 and 2010, growth in the tanker fleet is on track to more normalized levels in 2012.

On the demand side, we estimate tanker demand growth of approximately 5 % based on the latest assessments from oil demand growth from the major forecasting agencies of between 1 million and 1.5 million barrels per day, lead by non-OECD's and in particular, China. The net result, is that we expect a small decline in tanker fleet utilization next year before a potential tightening of the market in 2012 due to more balanced supply demand fundamentals. There are a number of factors which could create a better than expected tanker market in 2011.

Firstly, tanker ton mile demand could be greater than expected due to longer voyage distances. For example, if China were to source more crude from the Atlantic basin versus the Middle East. Secondly, an increase in oil trader driven arbitrage movements, which have been very low in recent months, could give a boost to tanker demand.

Finally, an increase in flippage or order cancellations could help relieve tanker fleet growth, especially given the fact that many of the ships due to deliver next year, were ordered at the peak of the market in terms of new building prices and may not be fully financed. So in short, while we expect a challenging year in 2011, there will be periods of rate volatility.

When rates spike we will benefit from our spot exposure and profit-share mechanisms in many of our time charter contracts and in lower rate periods, like this past quarter, we will protected by our strong fixed-rate contracts that average almost $25,000 per day in 2011.

Operator, we are now available to take questions.

Thank you. (Operator instructions). The first question comes from Michael Webber with Well Fargo, please go ahead.

Hey, good morning, guys, how are you?

Good morning.

Just wanted to talk and the tanker strength for VLCC and to be able to sea market how that could potentially bleed down to the smaller markets that you guys are operating in. Can you talk a little bit how the mechanics of that would work, and how you think -- as we stand today, how you think the next couple of months are going to progress, and whether or not the strength in the longer-haul assets classes are going to start to permeate the Aframax class?

Good questions. As we have seen in this past week, VLCC rates have started to increase, although they are volatile and up and down each day. Anecdotally, we are seeing Suezmax tankers benefit already as they compete to the Middle East, the AG cargo to the east and so those rates have spiked up in the last couple of days, including as recently as today, with fixtures increasing to the $18,000 to $20,000 over a day rates for Suezmaxes from the Middle East going East, versus a much smaller number of $13,000 to $15,000 for the West. So you can see how the markets of the smaller tankers of Suezmaxes and Aframaxes start to gain traction as the VLCC market picks up in certain areas. So over the coming months, as we see seasonal delays in the (inaudible) where we're seeing transit delays of two to three days in each direction, those types of factors start to reduce effective tanker supply, and lead to the stronger winter rates that we typically see.

Got it. No, I appreciate it. That's good color. You also mentioned in the relief and the deck that you signed a couple of charters, in your 2011 charter coverage now around 50%, given the fact that you guys kind of vary a bit from being a little more spot oriented to a little bit more fixed, around that 40% to 60% range, when we think about 2011, are you guys happy with where you are at right now at %50 cover or as you move to the next couple of months do you look to lock up a little bit of tonnage, particularly if we see a little bit of strength here over the next month or two?

Yes, 50% is a good rate, and as you have probably seen historically, we have taken advantage of managing the fleet during periods of rate spikes and where time charter rates have followed up. The other benefit we have in our portfolio, we have fortunately many of our time charter contracts our floor with profit share mechanisms, so we will be able to take advantage of the winter spike and than be protected on the floor when and if the seasonal low come in 2011.

Okay. Fair enough. I guess, one more question and I'll turn it over. Can you -- have you guys broken out the per-vessel costs of the drop down and if you have and I haven't seen it -- maybe I just missed it -- but can you give an idea of where you would peg Aframax's values at today?

I don't believe we have -- actually -- yes, no, we haven't broken down per vessel. I think -- vessel values have generally remained where they have because of currency pressures from new building prices and steel prices on labor, tightness in China, so we're still seeing Aframax values in the high 50s, and Suezmax values in the high 60s.

Okay. Great. All right. Thanks a lot for the time, guys, I appreciate it.

Thanks.

The next question comes from Ken Hoexter with Bank of America, Merrill Lynch. Please go ahead.

Hi, everyone. It's Scott Weber in for Ken.

Hi, Scott.

Hi, Bruce. Given the boost in liquidity levels you guys have now and your current capital structure, would your next level of growth come without an equity raise, or is this really the debt and equity profile you would like to maintain going forward?

I think the increased liquidity provides us the flexibility to act fast when opportunities arise, and I think we will see some attractive opportunities over the next year or two, given our outlook, and then -- so that gives us the flexibility to decide the optimal mix at the time, but primarily it's for ability to just react quickly.

Okay. So you could conceivably, obviously given the liquidity go out now without an equity raise to add a vessel, and then potentially backfill that if you wanted to reduce debt levels later?

That's right, if I can add a comment. It gives us the optionality of acting quickly, but it doesn't dictate our capital structure. Our capital structure will be a long-term view, and I guess we want to use a mixture of debt and equity, so this last transaction, I guess we over expertise slightly, upon inspection we used more debt. It will be on an at home basis depending on the market outlook and the opportunities that arise. But I think it just gives TNK more flexibility than some other players that have to go raise equity first, so then opportunities that could be attractive might have disappeared in the meantime. We don't have that problem.

Okay. And can you just talk for a minute about the sale of the Sotra Spirit, and whether or not you are seeing 15-year old vessels getting notably lower rates than they had been historically? What was it that particularly made the timing right for the sale of that vessel?

Yes, I think there was a opportunistic buyer for that vessel. We are seeing vessels of that vintage have fallen recently, especially given the rate environment, and the older vessels have more expensive maintenance and capital expenditure requirements to maintain, and so I think that's kind of the general trend we have seen in second-hand values that the ships from 15 years and on start to decline a little bit faster down the value curve than modern tankers.

Great. And just one last question here. I think, if I recall correctly, there's no scheduled dry dockings for the fourth quarter and 2011, is that right?

That is correct, we have finished our program for 2010, and there are no dockings planned for 2011.

Great. Thanks a lot.

Thank you.

The next question comes from Scott Burk with Oppenheimer. Please go ahead.

Hi, good morning, guys.

Good morning.

You talked about the benefits of the prearranged debt on the Esther and Iskmati Spirit, sorry if I got the name wrong there.

That's okay.

But when you get those favorable loan terms, does that add to the cost of acquiring the assets, and does the conflict committee consider that?

Absolutely the conflict committee looks at all aspects of the transaction, a small cost is added on for that, and you kind of weigh that off, versus alternative financing's that Teekay Tankers could obtain in the market itself, and all of the costs going in to arranging it, but it is offered at less than market terms, so it's attractive net financing for Teekay Tankers.

Okay. Okay. So TKA parent does get some benefit, but it still ends up being a good deal for Teekay Tankers.

That's correct.

Okay. And then just a -- I'm sure you have been asked this many times, but you talked about TK offering the vessel to TNK. How does that discussion start? I mean you guys have clearly done an equity offering shortly before that and you had the equity to do something. Does it kind of -- what starts the discussion?

Well, there are two ways it started. Maybe I can discuss how it starts at the parent-company level. The parent Company has a series of assets of commercial tankers sitting upstairs.

Yes.

And Teekay Corporation will then decide it would like to crystallized some of the value that is not being recognized in some of the parts, and Teekay parent has sold ships to third parties and it has sold ships to Teekay Tankers. Financial steps is to go to TK Tankers first and say here are some ships that we would be interested selling, we think it would be a good fit for you. (inaudible). And then I'll hand it over to Bruce -- .

Right. At the same time I guess Teekay Tankers is looking out in the sale and purchase market for what is available in third-party tonnage, and then evaluate the offers from -- the offer, it comes, but from Teekay Corporation, and as we outlined at investor day, there are inherent advantages with the ship, charter coverage, with the debt financing, with the faster time to close and no change in technical manager, so you evaluate that versus a sanity check versus third-party opportunities to see what is in the market, and the conflicts committee reviews all of the materials, and makes a decision on whether the offer from Teekay Corporation is the best for Teekay Tankers.

Okay. All right. Great. And then maybe Bjorn or Vince, when you do offer those ships down to TNK, clearly, I guess that debt benefits the TNK is receiving -- if you were to offer it outside -- to an outside party, you would not be able to offer that debt, right, because it has -- there would be -- you wouldn't be able to transfer the debt?

That's right, yeah, we wouldn't be able to transfer that to a third-party, so that one of the benefits of keeping it in the corporation, and -- retain the favorable financing within the Teekay group, so it benefits both Teekay corps, and Teekay Tankers.

Right. You have kind of made a move in to VLCC this year, with first of all the loan, and then the new build for 2013, and just wondering, you talked about that being potentially more over supplied market for 2011. It seems like you are preparing the Company to be able to buy more -- get more involved in the VLCC market. Is that where you see yourself buying or more ships in the next year or two?

Yes, I think there will be opportunities in that segment. The core fleets for Teekay Tankers now is Aframaxes, and Suezmaxes, where our sponsors has large commercial pools that we can trade in. But clearly, we're going to be opportunistic within the segments as to which provides the most value, upside, and accretion for Teekay Tankers.

Okay. And just how do you plan on chartering those VLCC? This is two years out, for the new build, but would you be a little more prone to have long-term -- one, two-year, or three-year charters on the VLCCs or would you look to get more involved in maybe some other organization pool?

It is actually. Your time charter idea is good. It is actually on a five-year time charter.

Yes of course.

So for that one -- .

Good point.

Yes.

All right. Thanks.

Thank you.

(Operator instructions). The next question comes from Justin Yagerman with Deutsche Bank. Please go ahead.

Hi, everyone it is Joshua (inaudible) in for Justin again. Most of my questions have been answered, but I just wanted to follow up on the VLCC point that Scott made. You seem to have no real VLCC market risk, I guess until either the loans expire or come due for repayment or your VLCC new building delivers. Was that on purpose? Are you guys cautious on the VLCC earnings environment over the next couple of years or is that just because those were the best opportunities in the space that you saw?

That's a good question. Historically, Teekay has had focus -- and tankers -- Teekay Tankers -- has focused on Aframaxes and Suezmaxes for scale and being able to maximize the premium upon which those ships trade. And so VLCCs historically we have had some at Teekay Corporation, some presence in VLCCs, but not a significant amount, and it's now looking forward, potentially an area of opportunity, both because of the supply demand fundamentals in the short-term which could lead to attractive opportunities, but also the growth story in the longer-haul trades to China, China importing more oil from West Africa and the Middle east leads to a different supply dynamic for VLCCs going forward.

And if I could add, Bruce, I think Teekay is also looking much more at China, or being a customer, so the VL plays in much more into that idea as well.

Okay. Thank you, guys.

Thank you.

There are no further questions at this time. Please continue.

Thank you for listening today. We look forward to seeing you on future calls.

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