Teekay Tankers Ltd (TNK) 2013 Q4 法說會逐字稿

Welcome to Teekay Tankers Ltd. fourth quarter and FY13 earnings results conference call.

(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. Bruce Chan, Teekay Tankers Ltd.'s Chief Executive Officer. Please go ahead, Sir.

Before Mr. Chan begins I'd like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the fourth quarter and FY13 earnings presentation. 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 fourth quarter and FY13 earnings release and earnings presentation available on our website.

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

Thank you, Ryan. Hello everyone, and thank you very much for joining us.

With me here in Vancouver is Vince Lok, Teekay Tankers' Chief Financial Officer;

and Brian Fortier, Group Controller of Teekay Corporation. During today's call, I will be taking you through Teekay Tankers fourth quarter and FY13 earnings results presentation which can be found on our website.

Beginning with our recent highlights on slide 3 of the presentation, Teekay Tankers generated an adjusted net loss of $0.03 per share in the fourth quarter compared to an adjusted net loss of $0.05 per share in the third quarter. Cash available for distribution or CAD was $0.12 per share in the fourth quarter, up from $0.10 per share in the third quarter. These increases were primarily due to stronger Suezmax and Aframax spot tanker rates earned in the fourth quarter and interest income recognized on our term loan investments secured by the two modern VLCCs.

In accordance with our current fixed dividend policy, the Company declared a fourth quarter dividend of $0.03 per share. This was Teekay Tankers 25th consecutive quarterly dividend which was paid on January 31st to all shareholders of record as of January 17th. Since inception, Teekay Tankers has paid a total of $7.30 per share in dividends. Teekay Tankers' dividend is currently fixed at an annual level of $0.12 per share payable quarterly.

During the first quarter, the company recorded a $14.9 million reversal of the previously recorded loss provision on its investment and term loans, secured by two VLCCs. As a result of this reversal, the previously recorded loss provision associated with these term loans has been fully eliminated.

In January 2014, Teekay Tankers and Teekay Corporation jointly created and co-invested in Tanker Investments Limited, TIL, a new tanker company which will seek to opportunistically acquire, operate, and ultimately sell modern secondhand tankers to benefit from the cyclical recovery we believe has now begun in the tanker market. Teekay Tankers and Teekay Corporation each invested $25 million for a combined 20% ownership interest in the new company.

Also, as previously announced, the Teekay Corporation and Teekay Tankers boards of directors agreed in principle to the sale of Teekay Corporation's conventional tanker, commercial, and technical management operations to Teekay Tankers. Upon completion of the sale, Teekay Tankers will receive the fee revenues that Teekay Corporation currently receives for commercially managing a fleet of 82 vessels and technically managing a fleet of 49 vessels.

In December of 2013, the previously detained VLCC, B Elephant, which secures one of the Company's term loan investments was released by the Egyptian authorities. The vessel is now trading in the spot tanker market under Teekay Tankers' management and generating cash flow.

In January 2014, crude tanker rates briefly reached their highest levels since the third quarter of 2008. Mainly as a result of higher crude oil imports into China and increase in long haul crude oil movements from the Atlantic basin to Asia and seasonal factors, which I will cover later in the presentation.

Turning to slide 4, I would like to take a moment to discuss Teekay Tankers' involvement in creating and co-investing in Tanker Investments Limited or TIL. In January, 2014, TIL completed a $250 million equity private placement in which Teekay Tankers invested $25 million for a 10% ownership interest in the new company. As a cofounder and sponsor of TIL, Teekay Tankers will have the right to nominate one of TILs board members and will receive half of the 1.5 million warrants allocated in the transaction which will vest and gain value as TIL shares increase to specific price levels.

As I noted in my opening remarks, TIL will focus on opportunistically acquiring, operating, and ultimately selling modern secondhand tankers at the right time in the tanker cycle and will be managed by a dedicated management team here at Teekay. TIL's vessels will operate in Teekay's commercial pools along with vessels owned by Teekay Tankers and other owners, providing additional scale to the Teekay managed commercial tonnage pools.

Initially TIL's fleet will consist of four Suezmax tankers and four Aframax tankers which TIL has agreed to acquire from Teekay Corporation and a third-party vendor respectively between March and June this year. The remaining proceeds of over $100 million from the private placement will be used to acquire additional tankers and for general corporate purposes. We are excited to play a role in the creation and growth of TIL which provides shareholders of Teekay Tankers with an additional way to benefit from the appreciation and secondhand asset prices associated with the cyclical recovery from the low tanker market of the last four years.

We believe our investment in TIL complements Teekay Tankers' existing core strategy of operating tankers to service our customers through the tanker market cycle. Which includes the strategic renewal of our fleet through both new building and secondhand asset purchases and actively managing our market exposure through a combination of in charter opportunities and fixed rate out charters.

Upon completion of Teekay Tankers acquisition of Teekay Corporation's conventional tanker, technical, and commercial management operations, Teekay Tankers will be able to generate fee revenue from the management of both TIL and third-party vessels. In summary, Teekay Tankers now has the flexibility to either directly invest in secondhand tankers or invest in future growth of TIL.

Turning to slide 5, I will provide an update on Teekay Tankers' term loan investments secured by two 2010 built VLCCs. As mentioned in my opening remarks, B Elephant was released by the Egyptian authorities in December 2013. After which Teekay Tankers took over commercial and technical management of the vessel and began trading her in the spot market. Both vessels securing our term loan investments are now under Teekay Tankers' management with all accrued earnings going towards the full repayment of the amounts owed to Teekay Tankers under these loans.

In the fourth quarter, as a result of the general increase in vessel values, Teekay Tankers recognized $2 million of interest income and recorded a $14.9 million reversal of the loan loss provision previously recorded on this investment. Based on current estimates, Teekay Tankers now expects to recover the full carrying value of the loans, including the principal balance, redemption premium, accrued interest, and out-of-pocket expenses incurred to date.

This is of course an addition to the 9% per annum interest income we have already received during the first 2.25 years of our $115 million investment. While we work through the process with the borrowers and second priority mortgagees, our plan is to continue trading the vessels on the spot tanker market while we evaluate our options for monetizing the vessels and maximizing the return on our investment.

Turning to slide 6, we take a look at the recent developments in the crude tanker spot market. As shown by the chart on the slide, average global spot rates for Suezmax and Aframax tankers reached a five-year high of approximately $75,000 per day and $65,000 per day respectively in mid-January 2014. With earnings on certain routes exceeding $100,000 per day.

This winter spike is unlike anything we have seen since the financial crisis of 2008 and 2009. And is a reflection of both tightening fundamentals and strong seasonal factors.

Starting with the fundamentals, in the last few months we have seen very high oil demand in both the developed and developing world which has boosted demand for crude tankers. Chinese crude oil imports hit a record high of 6.6 million barrels per day in January 2014 driven by a combination of new refining capacity and stockpiling. Much of this oil has been flowing from the Atlantic basin, including West Africa and Latin America, which is positive for tanker ton miles due to the long haul nature of such trades.

Demand has also been strong in the developed world with the IEA reporting that oil inventories in the OECD declined by 1.5 million barrels per day in the fourth quarter of 2014. The steepest quarterly decline since 1999. This is partly due to the extremely cold weather seen in parts of North America, but it's also a reflection of better levels of underlying demand than were previously forecast.

In addition to the strong demand fundamentals, several seasonal factors boosted crude tanker spot rates during December and January. This was particularly true in the Atlantic basin where winter weather conditions in the Black Sea, Mediterranean region, and the US Gulf led to severe vessel delays and a sharp increase in rates as charterers searched for replacement tonnage.

Turning to look at slide 7, we look at developments in the product tanker market. Earnings in the product tanker sector have been steady in recent months, showing less volatility than crude tankers. However, it is important to note that while product tanker rates have not spiked like crude rates, they have nevertheless provided stable returns through the tanker market downturn, and at times have outperformed the crude sectors despite their smaller ship size and lower levels of invested capital.

It is also important to note that Teekay Tankers has been able to outperform industry benchmarks through the use of its commercial pools, including the Taurus Tankers LR2s pool. The use of pools allows us to achieve higher levels of fleet utilization due to the scale such pools afford, including the ability to minimize time and ballast through triangulation.

For the Taurus pool, we were also able to beat industry benchmarks because of our ability to keep some vessels in the dirty Aframax trade to take advantage of spikes in the crude market. You can see from the chart on the top left-hand part of the slide that by moving some ships into the strong dirty Aframax trade in recent weeks, we were able to elevate our LR2 earnings above the clean industry benchmark which will be reflected in our first quarter 2014 results.

Looking ahead to the rest of 2014, demand fundamentals in the product sector remained strong. We believe that this will continue to drive of fleet utilization and therefore rates through the course of the year. In particular, the start up of new refining capacity in the Middle East and Asia and the continued closure of refineries in Europe, Japan, and Australia, are expected to create new trade routes for refined products which will benefit product tankers.

Turning to slide 8, we look at improving crude oil demand fundamentals and the expected impacts on the tanker market in 2014. As shown by the chart on the slide, the outlook for global oil demand has improved significantly since the middle of last year, with the IEA revising its 2014 oil demand forecast up from 92 million barrels per day in its July 2013 report to 92.6 million barrels per day in its most recent February 2014 forecast. This is in contrast to recent years when the trend has been for market forecasters to overshoot their estimates on oil demand and to revise their forecasts downwards during the course of the year.

The stronger outlook for oil demand is due to an improving economic outlook. Particularly in the developed world where sustained recovery seems to be finally taking hold. This positive outlook is reflected in recent publications from the IMF and the World Bank, both of which published upbeat reports in January with an improved outlook for global GDP growth in 2014 and beyond.

This improved outlook for global oil consumption should translate into stronger tanker demand during 2014. Which, combined with the low levels of fleet growth, is expected to drive tanker fleet utilization higher in the coming months.

The improved demand outlook is reflected in the chart on slide 9 which shows our forecast for tanker fleet utilization for 2014 and 2015. The dark blue bars on the chart show tanker demand growth while the red bars show tanker fleet growth. The green line shows tanker fleet utilization which is simply tanker demand divided by tanker supply.

As you can see in the chart, tanker fleet utilization has been in the low 80% range since 2011 and this has coincided with a period of very low tanker rates. However, we believe that 2013 will prove to be the trough of the market and that utilization will improve from 2014 onwards as demand growth begins to outweigh supply growth.

We are currently forecasting tanker fleet growth of just over 1% in 2014, the lowest level of fleet growth since 2001. As outlined in the previous slide, tanker demand growth is expected to accelerate this year, due to better underlying levels of oil demand as the global economy continues to recover. This is expected to give rise to tanker demand growth of approximately 3% in 2014, meaning that overall fleet utilization is forecast to increase by approximately 2%.

For 2015, the trend is similar with fleet growth again expected to come in at just over 1% while demand growth improves to around 3% to 4%. This means that over the next two years, we expect tanker fleet utilization to return to the mid-80% range or higher. Which in turn should mean an improvement in spot tanker rates compared to the very low levels seen in recent years.

In summary, our view of the fundamentals is that we are at a cyclical turning point for the tanker market, with a better supply demand balance forming the basis for a sustained tanker market recovery in the coming months and years.

Turning to slide 10, as I touched on a few slides back, spot tanker rates have increased considerably in the first quarter of 2014. Compared to the averages for the fourth quarter, first quarter to date realized Suezmax and Aframax rates have been significantly higher and LR2 rates have also improved slightly from the fourth quarter.

Based on approximately 65% of spot revenue days booked, our first quarter to date Suezmax bookings have averaged approximately $34,300 per day, significantly up from the $15,200 per day in the fourth quarter. And our first quarter to date Aframax bookings have averaged approximately $25,300 per day, up from the $13,900 per day in the fourth quarter.

Based on approximately 75% of spot revenue days booked our first quarter to date LR2 bookings have averaged approximately $14,700 per day, up from $12,900 per day in the fourth quarter. While our average booked rates in the first quarter to date are considerably higher than several previous quarters, rates have been softening over the past few weeks and current spot rates are substantially lower. Nevertheless, based on our bookings for the first quarter to date, we expect that our earnings and cash flow in the first quarter of 2014 will be much improved over the fourth quarter of 2013.

Despite the recent cooling of spot tanker rates, we are encouraged by the rates achieved in the tanker market over the past couple of months, which we believe points to a general tightening in the supply demand balance for crude tankers and a signpost of the beginnings of a meaningful market recovery.

With that, operator, we are now available to take questions.

(Operator Instructions)

Jon Chappell, Evercore.

I wanted to talk about the Teekay operations, see if there's any more clarity you could provide around that. First of all, when is that acquisition supposed to closed? And then second of all, the fee revenue from operations is there any way to kind of give us, obviously not forward guidance, but what that fee revenue for the technical and commercial management of those pools was for Teekay Corp let's say in 2013?

On your first question, Jon, it's expected that the transaction would close in Q2. And in terms of guidance, we can probably give a little bit better off-line, but as you know commercial pools charge 1.25% of gross rates and a couple hundred dollars a day, somewhere between $200 and $300 a day for administration costs and so that's kind of their revenue line. And then there's obviously associated costs with that but I can't really give you much more than that at this time.

Okay. And then the TIL part of that operations business let's call it -- is it fees for just the gross freights? But it sounds like this business is going to be a little bit more of sale and purchase opportunistic, is there any fees associated with S&P activity for the owned tonnage and then with TIL?

Yes. The fees are kind of split, so the commercial and technical will be owned by TNK and so those fees will accrue to TNK. On the S&P side, that will accrue to our overall sponsor which is still Teekay Corp.

Okay, got it. And then if you could just explain just a little bit more, TIL wants to be very nimble and opportunistic, et cetera, but where is TNK's kind of direct growth initiatives coming from now? Is it really competing against TIL or do you see growth more through just the return of the cycle and fees from the operations business, is there really a lot of growth potential directly for TNK?

Well, TIL is an enhancement of that growth for TNK through its ownership and the participation in the warrants. But as you say, TNK's growth is the return of the cycle and enhancing that potentially through additional in charters and the timely renewal of the fleet, but so we do see there being more opportunities at TNK in addition to the benefit of being an investor in TIL.

Okay. Final one on the two VLCCs. I know you probably don't want to say any timing about when you would sell them. Just trying to figure out the modeling of those. You had mentioned in your prepared remarks that there was interest income associated with that, so are they going to show up as you operate them and generate cash flow, especially in the strong VL market, in your revenue line, in your operating expenses line, or is there just going to be an operating income line associated with that?

Hi Jon, it's Vince. As of right now, these loans are still sitting as loans receivables with a book value of $136 million. Should the values change that could potentially result in additional interest income recognized in our revenues.

However, if we were to take ownership of the vessels then they would switch from being a loan receivable into vessels on the balance sheets and that would change the accounting for that. But as of right now, they are still sitting at loans receivable right now.

Okay. And how are the conversations going with the second mortgagees with that? We've talked about this in the past, this was a unique opportunity for you.

It looks like it's going to end up paying off, but VLCCs aren't your core competency really, I mean they are crude tankers but you're more of a midsize operator. Do you ideally hope to dispose of these at some point, or given your views on the cycle, you hold onto them a little bit longer?

Yes. Our discussions with the other mortgagees is clearly defined through our coordination agreement so that's on an ongoing clear process. And then in terms of the future, again, you're right, we would ultimately like to deploy this capital in our core segments of Aframax or Suezmaxes, but the timing is not one that we'd need to take immediate action. So it will be a balance between finding the right time and the right buyer for these assets, or in the meantime, we have the luxury of being patient and generating cash flows in the spot market

Okay, understood. Thanks a lot Bruce, thanks Vince.

Thanks, John.

Justin Yagerman, Deutsche Bank.

This is Taylor Mulherin on for Justin this morning. I just wanted to follow up quickly on TIL. Just to get a little clarification, I understand there's different strategies between the two companies but could you just elaborate a little bit on how any conflicts if there were a market opportunity to come up with a vessel that could potentially be attractive to both companies was out there? How would something like that be resolved?

Yes. Fortunately the sandbox is quite large out there for a number of ships so we don't anticipate a lot of conflicts, or very little conflict. But if there were rare opportunities where both companies were looking to buy assets, we would certainly work together and not be out there ensuring that we don't bid up the price for the third parties, we would be looking at obtaining the best value for ships amongst the whole Teekay group.

Got it. And then just a couple questions about the market in general. Obviously the market's been pretty strong in Q4 and then earlier in Q1. It's come off a little bit lately. But I wanted to ask you, is there sort of a lag effect from what we see in the market when we just look at spot rates versus what actually hits the bottom line for Teekay Tankers, and then if there is one, basically how long is that usually?

Yes. There is certainly a lag effect. You fix ships which you read in the market reports but then the voyages don't usually start for a few weeks and counting. Then a cruise at over from a discharge to discharge port basis, so the lag, Vince would say it's about two or three weeks maybe, roughly.

Yes. That's about right.

Yes, that's usually the lag.

Got it. Okay, and then my last one, you talked about how you are more focused on the midsize Suezmax and Aframax vessels more than VLCCs. Is there something, and clearly there must be something, that you find more attractive about those sized vessels, maybe certain that trade lanes appear more attractive, you talked about the Atlantic to Asia route. Can you just sort of elaborate on what you are seeing in those specific trade lanes for those vessel sizes?

Sure, Taylor. Our general overall view is that the larger tanker segments Aframax, Suezmax, and VLCCs are largely correlated and so the reason, over time, and so the overall reason why we like Aframax and Suezmax is because that's our area where we have the scale.

We operate our own commercial tonnage pools for both of those segments where we combine our ships with other people's ships and therefore have the ability to triangulate, and have higher utilization, and therefore outperform the market in those areas as well as our customer relationships are people looking for that -- those size segments. And finally those segments tend to also offer, particularly Aframaxes, a greater ability to trade through charters in and out, and so those are the reasons why we like it, but overall those markets are generally are correlated.

Great. Thanks for your time.

Thanks Taylor.

Fotis Giannakoulis, Morgan Stanley.

I have a couple of questions about if you can give us a description of how the flows have changed versus the beginning of the year. We saw the rates spiking towards the end of 2013 and early 2014 and lately the rates have come down. What was the reason of this significant volatility?

Yes. Hi Fotis, it is a combination, as we said, of seasonal and the fundamental shift. January was one of the highest months for imports in China and those barrels are going west Africa, Latin America, out to South America, to the east, so we had a combination of those types of fundamental increases in oil supply.

And then as well the seasonal factors such as refinery -- timing of refinery maintenance now kicking it in the spring causes those markets to come down and the diminishment of certain of those weather delays that you would have seen more in the winter. So it's a combination of those two factors that caused that spike.

Thank you. So I see the graph with your performance and it's clearly much higher than what the market average. You gave us an explanation about the LR2 vessels trading in the dirty space, what is the reason that you have such a good out performance on the MR segment?

The MR segment, again, is because the benchmark rate there tends to be on various routes specific, as opposed to the triangulated route, and I know you published in yours a triangulated route MR and that is a much better benchmark. So our earnings obviously reflect the actual triangulation of those MR ships trading in a large pool, and that's the one pool that Teekay does not operate, we trade it in a third-party pool but has significant scale. And again, we benefit from that scale and triangulation.

And can you give us an outlook for the product tanker market the rest of the quarter? Do you see improving versus the beginning of the quarter that seems to have started at a much weaker base?

Yes. As we said in the prepared remarks, the product tanker markets tend to not have the big spikes. They been more stable and we see that continuing. The underlying fundamentals are still good and the general theme of that -- of the increased demand for product tankers we believe is still intact, but that market just traditionally hasn't seen that significant rate volatility that the crude markets have.

Thank you. One last question about the TIL investment. What was the reason that Teekay invested together with TNK in this new venture? Was the capital of Teekay necessary? Why this complicated structure?

Well, I can't speak for Peter from Teekay Corp, but the contribution of the four Suezmaxes were the last owned conventional ships from Teekay Corp, helping it transform its model of having all of the assets at the daughter companies and so that was the contribution there from Teekay Corp. And then from TNK's perspective it's the ability to invest in secondhand tankers and increase the exposure for our shareholders at TNK to the return of the tanker market.

Thank you.

Thank you, and there are no additional questions at this time. Please continue.

Thank you, Tracy, and thanks everyone for joining us this quarter. We will speak to you next quarter.

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.