Teekay Tankers Ltd (TNK) 2010 Q4 法說會逐字稿

Welcome to Teekay Tankers Limited Fourth Quarter and Fiscal 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 Chief Executive Officer. Please go ahead, sir.

Before Mr. Moller begins I'd like to direct all participants to our website at www.TeekayTankers.com where you will find a copy of the fourth quarter and fiscal 2010 earnings presentation. Mr. Moller and Mr. Chan, who will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Fourth Quarter and Fiscal 2010 earnings release and earnings presentation available on our website. I'll now turn the call over to Mr. Moller to begin.

Thank you, Kent. Hello, everyone. Thank you very much for joining us. With me in Vancouver is my successor as Teekay Tanker's CEO, Bruce Chan, Vince Lok, Teekay Tankers Chief Financial Officer, [Brian Fortier], Corporate Controller of TK Corporation, and Peter Evensen, Executive Vice President and Teekay Corporation's future CEO. I'd like to turn the call over to Bruce who will lead us through the presentation. Go ahead, Bruce.

Thank you, Bjorn. Good morning, everyone. This morning we are reporting on Teekay Tankers results for the Fourth Quarter and Fiscal 2010. I'll begin on slide 3 of the presentation with our recent highlights. The Company yesterday declared a quarterly dividend for Q4 of $0.22 per share down from the prior quarter primarily due to weaker spot tanker rates experienced in the Fourth Quarter. This dividend is payable on March 15, 2011, and the dividend per share amount is based upon the average amount of shares outstanding during the relevant quarter which in this case is the Fourth Quarter of 2010.

During the Fourth Quarter, our policy of tactically managing our fleet between spot and short-term charters was a real benefit to our shareholders, roughly 60% of our fleet was booked at average time charter rates of approximately 24,400 per day while our spot ships which represented about 40% of our fleet earned approximately 9500 less or 14,800 per day. For the quarter, we earned Adjusted Net Income of $2.6 million or $0.05 per share excluding the impact of non-cash items that have been summarized in Appendix A to the earnings release. We completed the acquisition of one Suezmax tanker, the Iskmati Spirit and one Aframax Esther Spirit, in early November for a total cost of $107.5 million. Due to the timing of closing this acquisition, these ships only contributed to Teekay Tankers dividend for roughly half of the quarter. We are looking forward to the First Quarter of 2011 when these ships will contribute toward the dividend of the entire quarter.

I'm also pleased to announce we have entered a 23 month time charter extension at a rate well in excess of the current spot market on one of our existing Suezmax's. The Narmada Spirit was previously earning $19,500 per day plus profit share and has been renewed at an average floor rate of $21,500 per day plus profit share for the next two years. With this new charter, we now have approximately 62% fixed coverage for the First Quarter and approximately 57% for all of 2011. Lastly, in February of 2011 of this year, we completed a 9.9 million share follow-on offering including the entire green chute raising net proceeds of $107.6 million and increasing our total liquidity to approximately $295 million. As I will detail later in the presentation, putting this money to work in an accretive manner is one of our top priorities for 2011. On the next few slides I'd like to look back on a few of the highlights from Fiscal 2010 and then walk through our priorities for 2011.

Turning to slide 4 of the presentation, including the $0.22 dividend announced today we have declared $1.24 per share in dividends with respect to 2010. This dividend is much higher than it otherwise would have been had our fleet been solely trading in the spot market. We expect our fixed rate coverage will continue to positively contribute to our ability to pay a healthy dividend in 2011. We earned $22.4 million or $0.53 per share in income, excluding the impact of non-cash items that have been summarized in Appendix A to the earnings release. In July 2010 we invested $115 million in two first priority ship mortgages secured by two VLCC new buildings, earning an interest rate of 9% on a cash basis. We drew down on a portion of our undrawn attractively priced revolving credit facility to finance this investment. The investment is performing as expected and is expected to continue contributing to our dividend through its maturity in mid 2013. In 2010, we grew our fleet by four ships while at the same time increasing our liquidity and maintaining our portfolio of fixed rate coverage. We also reduced the average age of the fleet from nine to eight years through the disposal of two older ships for proceeds of $34 million. We entered a 50% joint venture with Wah Kwong of Hong Kong to jointly own a VLCC new building which is scheduled to deliver in 2013. Upon delivery, the ship will be chartered to a major Chinese ship owner for a period of five years.

On Slide 5, we have shown the evolution of our fleet since our IPO in late 2007. With the transactions I just noted shaded in the 2010 box. In many ways, 2010 was a significant year for Teekay Tankers.

Not only in terms of fleet growth but turning to slide 6, in terms of revenue composition as well. As we've highlighted in the red boxes, our asset investments this year were balanced between spot traded ships and fixed rate investments. As a result, for the First Quarter of this year, we see our coverage at approximately 62% and averaging a healthy 57% for all of 2011.

Looking ahead to 2011 on slide 7, we have listed our key priorities for 2011. Our first priority as always is to continue to provide superior operations by focusing on health, safety, and the environment. We will look to profitably deploy our proceeds raised in our recent follow on offerings by buying either new building resales or secondhand tonnage. We believe that time is on our side because we believe that prices for existing ships will come under further downward price pressure unless there is a meaningful increase in spot tanker rates; however, there is a possibility that prices for new buildings will stay relatively firm due to weakness in the US dollar, high steel prices, and limited shipyard capacity for Tankers as I will elaborate on a subsequent slide. Another priority for 2011 will be to consider taking advantage of any potential volatility and time charter rates by extending existing time charters or fixing new fixed rate charters should rates increase as a way of replacing some of the time charters that roll off in the latter part of 2011. On the other hand, should time charter rates weaken further in 2011, we may look to end charter or lease ships from other owners. End chartering would be something new for Teekay Tankers but in essence allows us to gain operating leverage to an increase in tanker rates with minimal capital investment. We believe our Company's ability to respond to changes in the tanker market-rates will create value for our shareholders and in addition to buying and selling ships at the right time.

Looking at slide 8, I will take a moment to detail the current spot tanker rate environment before turning to a discussion of the broader tanker market. There has been some short-term volatility in spot tanker rates due to a variety of factors, including seasonal factors such as ice in the Baltic, as well as an increase in Middle East OPEC production going to China; however overall spot tanker rates have been weak, proving our 60% fixed rate coverage to be even more valuable. As in the past, on this slide we have presented our Q1 2011 dividend guidance table. For the quarter to date we have booked approximately 60% of our Aframax spot revenue days at 15,000 per day and Suezmax spot revenue days at 14,400 per day. It is rare for Aframax rates to be higher than Suezmax rates and reflects the current market environment of an oversupply of spot tonnage in certain areas resulting in both lower rates and more waiting time.

Turning to slide 9, let's take a look at the tanker market fundamentals as we see them shaping up. The conventional tanker market proved to be a year of two halves in 2010 with relatively strong earnings in the first half of the year giving way to a weaker second half as vessels return to the spot trading fleet from floating storage. Tanker demand was robust throughout the year on the back of global oil demand growth of 3.3%, the second highest level since the 1970s. The global tanker fleet grew by 4.5% in 2010, a significant decrease from 7.1% fleet growth in the previous year; however, the unwinding of floating storage added a further 3% to fleet growth during the second half of the year which tipped the balance back to oversupply and led to lower rates. This overhang of tonnage has continued to exert downward pressure on utilization represented by the green shaded area and tanker rates as indicated with the blue line through the first half of Q1 2011.

Turning to slide 10, we outline our view for the tanker market in 2011 and beyond. For 2011, we expect the relatively high fleet growth of around 7% will continue to offset tanker demand growth of approximately 5% to 6% and ensure that 2011 remains a challenging year for spot tanker rates; however, we could see some upside from an increase in OPEC production later in the year while the potential for regional oil supply disruptions due to the recent unrest in North Africa and the Middle East could also add to tanker ton mile demand in the near term. On the fleet supply side, we are seeing an increase in charter discrimination against older double hull vessels which is reducing the utilization of these older units. The marginalization of older units coupled with high scrap prices is leading to the scrapping of vessels at a younger age than in the past with a number of early 1990s built ships being sold for scrap in the early part of 2011.

Looking ahead to 2012 and beyond, we are starting to see the seeds of a potential tanker market recovery provided there's discipline in tanker ordering over the next 12 to 18 months. Tanker demand is expected to continue to grow at robust levels over the next one to two years driven by the energy intensive non-OECD economies and China in particular. As a result, the demand for ton mile intensive OPEC barrels is expected to grow which is positive for crude tanker demand. If the level of tanker ordering remains at current low levels during the remainder of 2011 then the tanker market should be more finely balanced going into 2012, setting the stage for our recovery in tanker fleet utilization and rates.

Slide 11 outlines what we believe to be the main factor for longer term tanker market recovery. Namely, the self-correcting nature of the tanker order book. In the past, a prolonged period of weak earnings has tended to result in a lower -- low level of new tanker orders with a 70% correlation between the two variables over the past decade. We believe that tanker ordering will remain low during the course of 2011 for a number of reasons. Firstly, weak spot earnings and a run up in new tanker deliveries, could discourage owners from placing new tanker orders. Secondly, several owners are facing capital and debt constraints as a consequence of both weaker spot earnings and because many are taking delivery of vessels which were ordered at the peak of the market when new building prices were around 35% higher than they are today. Finally, we believe that shipyards are unable to reduce their prices back to levels seen in the early to mid 2000 due to cost side pressures such as high steel prices and unfavorable exchange rates. Shipyards are also under little pressure to reduce their price ideas given strong new building demand from other shipping sectors such as container shipping and offshore.

Turning to Slide 12, we expect the downward correction in secondhand tanker prices through the course of the year as weak spot market earnings weigh on vessel values. In addition, the spread between secondhand prices and new building prices is growing, as is typical in a down cycle. The correction in secondhand values could present attractive acquisition opportunities during the course of the year, particularly if some Operators start experiencing severe financial distress. In addition, the relative strength of new building prices compared to secondhand values makes new buildings a less attractive option which should ensure that the level of new tanker orders remain low through the course of the year. Lastly, I wanted to take a moment to review Teekay Tankers strong financial position on slide 13.

Due primarily to the contribution from our fixed rate tanker fleet, our cash flow or dividend breakeven is currently well below zero. This means that even if our spot ships earn $0 per day in cash flow, we could still pay a dividend. At the end of 2010, we had over $180 million of total liquidity and if we include the proceeds from the recent follow on offering we have over $295 million of liquidity. We have a conservative net debt-to-capitalization of approximately 38% and minimal debt repayments through to 2015. We believe this financial strength is a hallmark for Teekay Tankers and will allow us to acquire assets at an optimal point in the cycle which will give us increased leverage to an eventual recovery in tanker rates.

Finally, on a personal note, I am privileged to take over leadership of this Company from Bjorn Moller and I would like to thank him on behalf of all shareholders for his contribution in both launching and leading Teekay Tankers through its first three years. Operator? We are now available to take questions.

Thank you. (Operator Instructions) Your first question comes from Jon Chapel of JPMorgan. Please go ahead.

Thanks. Good morning, Bruce.

Good morning.

So you certainly seem in a pretty good position for growth this year given your outlook on the market and then your financial structure. Most of your acquisition, I think all of them actually historically have been from Teekay parent drop downs. Is 2011 the year you think you'd go to third party transactions?

Good question. With our balance sheet, we are clearly looking to put those proceeds to use and looking at opportunities throughout the market both from our sponsor as well as in the market, and so it will again be a balance between which is the most attractive investment opportunity for Teekay Tankers but I wouldn't be surprised if we do look at more leaning towards third party assets this year.

And you mentioned that time was on your side. You think that asset prices are going to come down. Are there any other potential uses of proceeds in the immediate term such as the VLCC mortgage loans that you've done in the past that you may use for proceeds before asset prices reach what you think is a bottom?

I think our priority is to look at asset purchases. Time is on our side but that just means that we'll be continuing to secure the market to find the right deals. The VLCC loans I think we're at the right kind of portfolio percentage for Teekay Tankers on that type of investment.

Okay, and rates, although the outlook for 2011 isn't the best, may not be much weaker than they are today and you haven't done any charter ends yet. Is it really likely that you would go to that charter end strategy and kind of change your peer ownership strategy given the likelihood that rates probably aren't going to get a heck of a lot worse than they are today?

Spot rates are at low levels but we've seen just in the last few weeks weakness in time charter rates, especially in shorter duration periods where certain owners are looking for coverage to satisfy their balance sheet needs and so I think there is a chance that you see time charter rates with a little bit more weakness throughout 2011.

Okay, and then just given that one last follow-up. With the Everest Spirit rolling off its contract in the very near term would you expect to employ that in the spot market or in one year pools until the time charter rates improve?

That is the strategy, yes.

Great. Thanks a lot, Bruce.

Thanks, Jon.

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

Hi. It's Scott Weber in for Ken.

Hi, Scott.

Hi, Bruce. Just when you think about following the last question just in looking at internally sourced opportunities or externally sourced opportunities, do you have a much higher return hurdle for the externally sourced opportunities compared to say drop downs from the parent?

No, the return hurdle is the same. Obviously there are other factors as we've outlined in the past when we buy assets from the parent whether it comes with fixed rate cover or attractively priced debt but those are all factored into the calculation but the basic return hurdle is the same. We are indifferent. We look for the best investment for Tankers.

That's helpful and then in your remarks you alluded to your expectation for asset values to fall. Although we've seen relatively few transactions take place over the last four or five months, assuming rates remain low here, how much downside do you see the asset values from the most recent sales and what do you think the catalyst will be to push sellers to let go now ahead of a stronger 2012 outlook?

That's a good question. I think the real catalyst in asset prices is depending on the owners situation. Typical in stressed or distressed situations it's those owners that just can't hang on, they can't find time charter coverage they are the ones looking to strengthen the balance sheet and increase liquidity so you'll see those types of transactions will be the ones that drive the market lower whereas owners with stronger balance sheets aren't going to be looking to sell into that as they can hold on and wait and bridge that gap until the market recovers.

Okay, great. Thanks for the time.

Thank you.

Thank you. (Operator Instructions) Your next question comes from [Sandy Goldland] of Front Barnett.

Two questions. When you speak of older double hull vessels being less attractive, what age are you talking about? What category?

In general, charters tend to look at ships over 15 years of age as starting to be into the older double hull range although again it depends on who is managing the ship. It's not to say at all ships universally over 15 years of age are not of the same quality but that tends to be the age upon which people start to look at a little bit more carefully the technical quality of management throughout the period of ownership.

I'll just add that I think Teekay's operating reputation which of course Teekay manages Teekay Tankers vessels plays the significant role in acceptability. The other factor that's indicative of the discrimination against older vessels is that historically the age of scrapping has been 25 to 26 years where we've seen year-to-date shipping scrapping has taken place an average of 21 years, so that's I think insightful as it helps remedy the surplus of fleet.

Thank you. Are the other issues, everyone, you're not the only ones talking about having a very very good opportunity to buy vessels at lower prices and on the other side, I've been told that some of the main shipping finance banks have really started to really give deadlines to shipping owners which is going to force more tonnage into the market. Could you comment on both of those observations?

I think what's important as you look at the landscape is that what we've been through and when you look at 2009-2010 were people who didn't have enough money to complete the acquisition of vessels, so that's what we call unfinanced CapEx in our lingo, and what's happening now is some of the owners are not able to meet their, not only their principal payments but also their interest payments.

Yes.

So we're moving to the second phase where people -- where the negative cash flow from the operations is causing the pressure, and that second pressure is felt much more acutely by the banks because then they have to put loans on non-accrual status, so they are doing what you would expect which is exerting more pressure because they don't want to show the level of problem loans going up. In the first phase when they were able just to skip installments, then the loans were still current, so we're seeing from shipyards and from banks this pressure coming and so that's what's hitting the owners, and then as Bruce was saying, in many cases, the owners just have to take some money off the table or some exposure off the table so that means Teekay can do either one of two things. We can either charter which gives them some certainty and gives their banks some certainty or we can decide to buy the vessel.

And then my other comment was could you comment was -- everyone is saying the same things you are. Everyone in the business who has got their hands-on liquidity or thinks they do. Can you comment if everyone is so interested in purchasing, how far can values go down?

Well, on the margin, I think we've seen in the past that marginal deals can take things down toward a cash breakeven. In other words, without the benefit of leverage as you see it, so I don't think we know the answer to that question to be honest with you, as Bruce was saying, the features which are helping people are these high steel prices so the replacement cost of vessels is staying high but on the margin, if you have to sell, that's what's setting the market which is why we're finding this widening discrepancy between the new building rates and the secondhand prices.

Maybe I could add that I think the issue is we don't believe this is a V-shaped market. We think it's a U-shaped market and therefore we are not worried whether we get the absolute screaming cheapest deal out there. The issue is trying to get somewhere in the bottom quarter or bottom third of the cycle. In the long run you're going to make good money, if you can time your purchases to some point at the low cycle as opposed to taking the absolute low point.

Thank you very much.

Thank you.

Thank you. Your next question comes from Ken Johnson, a Private Investor. Please go ahead.

Good morning, gentlemen. If the spot market should surprise us and become more robust in the second half of '11 and into '12, will we have the flexibility given our current commitments to maximize that opportunity?

If you refer to the slide that shows our fixed rate coverage, you'll see that we do have ships from our fixed rate portfolio that do start to expire as you head into the second half of this year and into 2012 and so that exposure will naturally increase as the recovery hopefully takes shape in that time period.

Thank you very much.

And we have the profit sharers on several of our charters, so with those base rates we're able to benefit from -- directly from spot rates going up.

Oh, yes, thank you.

Thank you.

Thank you. Your next question is a follow-up question from Ken Hoexter. Please go ahead.

Thanks. Hi, it's Scott again. Just a quick follow-up. Since we're already pretty far into the First Quarter here, can you give us a sense for the type of rates you've seen thus far in the pools?

As we said earlier, Aframax rates have been around 15,000 fixed for about 60% of the days and it's on slide eight, and about 50% of the Suezmax days are at 14,400.

Okay, great. Thanks.

Thanks.

Thank you. Your next question comes from Ben Lerner of Third Avenue Management. Please go ahead.

Hi, it's Ben Lerner from Third Avenue Management. Just a quick question in regards to potential defaults in the market. Given what you're seeing with relationship banks and some of the pressure they're putting now on shippers to meet their obligations, do you expect to see any defaults or bankruptcies in 2011 if rates continue at sort of these depressed levels?

Well, we already see defaults on private bank loans which forces some sort of restructuring and so the question is what the bank does when they're in default, and I don't think we can comment on it because we're not involved with any of those issues but we've seen a raft of public and private companies have events of default which have been cured by the bank agreeing to waive them and so the discussion is whether they will take greater enforcement action, but to answer your question directly, we have not seen banks so far rest vessels and put them up for auction.

Okay.

But that's because we've only had a few quarters of negative operating cash flow.

But in your view, do you still believe that banks will remain flexible and will be more willing to amend at this point or are you seeing pressure from their side to really force the issue a little bit more?

I think based on the anecdotal evidence we've seen in talking with our bankers, there will be more pressure coming forward, and that's in part because as I said earlier, several loans are going to move to non-accrual status which forces an action by the bank and the second is that the banks have rebuilt their capital ratios so they can actually be more tough.

I think we can add also that the drive out market has taken a turn for the worse in the last month or two. I think that kind of contributes to the bank's overall perspective on the flexibility with loans, so it could actually cause them to act more aggressively.

But it's a great question and we're monitoring it and more importantly, we're monitoring specific situations.

Okay, thank you.

Thank you. (Operator Instructions) The next question comes from David Mack of Jay Goldman. Please go ahead.

Hi. I might have missed this earlier on the call but I was reading some trade magazines about some of the banks becoming a little more willing to use their balance sheets again for new loans, or at least that's what it seemed on the face of it. I wanted to get your sense as to whether or not there is some type of falling in the loan market and how you'd characterize that.

Yes, I think the loan market, I think the banks are in better shape, obviously than a couple years ago, but there's still some very large shipping banks that are not open for business and the ones that are still open are quite selective as to who they do business with, so they deal mainly with top borrowers like Teekay Tankers, so I think they continue to be very selective and so it is more of a two tier market I think going forward.

Okay, thank you.

Thank you. There are no further questions at this time.

All right, Operator. Well thank you all for your support and listening today. We look forward to future quarterly calls.

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