Teekay Tankers Ltd (TNK) 2019 Q2 法說會逐字稿

Good day, and welcome to Teekay Tankers Ltd.'s Second Quarter 2019 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. Kevin Mackay, Teekay Tankers Ltd.'s Chief Executive Officer. Please go ahead, sir.

Before Kevin begins, I'd like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of our second quarter 2019 earnings presentation. Kevin 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 2019 earnings release and earnings presentation available on our website.

I will now turn the call over to Kevin to begin.

Thank you, Lee. Hello, everyone, and thank you very much for joining us today for Teekay Tankers' Second Quarter 2019 Earnings Conference Call.

With me here in Vancouver, I have Stewart Andrade, Teekay Tankers' Chief Financial Officer; and Christian Waldegrave, Director of Research, Teekay Tankers.

Beginning with our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted EBITDA of $36 million during the second quarter, up from $17 million in the second quarter of 2018. We reported an adjusted net loss of $12 million or $0.05 per share in the second quarter, up from an adjusted net loss of $29 million or $0.11 per share in the second quarter of 2018.

Our improved quarterly results year-on-year points to the improved underlying fundamentals in the market this year. However, they were impacted by seasonal factors as well as some near-term headwinds, which I will touch on in more detail on the next slide. The continued strong growth of U.S. crude exports has helped bolster our full-service lighterage business and drove our average Aframax crude tanker spot rates to over $20,000 per day during the quarter. While spot tanker rates during the second quarter were significantly higher compared to the same period of the prior year, rates in the third quarter, thus far, have been affected by seasonal summer weakness. However, supply and demand fundamentals are signaling towards a firming tanker market in the latter part of 2019 and into 2020. I'll cover our market outlook in more detail later in the presentation.

Turning to Slide 4. We look at recent developments in the spot tanker market. As shown by the chart on the left, last quarter saw our strongest Q2 earnings since 2016 with average Aframax rates being particularly strong. The reasons for which I'll highlight on the next slide.

Rates have weakened at the start of the third quarter, which is partly due to normal seasonality and partly due to some near-term headwinds. However, the chart on the right illustrates the increase in rate volatility we have witnessed this year compared to the same period of last year, which would indicate tightening of the supply-demand balance. This is an encouraging sign as we head towards the seasonally stronger fourth quarter.

Turning to Slide 5. We look at the growth in U.S. crude oil exports and how this has led to increased lightering demand and our improved Aframax earnings. U.S. crude oil exports continue to set new highs with exports averaging 3 million barrels per day during the second quarter. Approximately 50% of all crude oil exports from the U.S. have been shipped to Asia in 2019 with a large increase in cargo volumes to India and South Korea replacing volumes to China that have decreased. These volumes to Asia are primarily carried on VLCCs, which require reverse lighterings by Aframaxes due to draft constraints in U.S. ports. This has led to an increase in lightering demand with rates commanding a premium to the Aframax spot voyage market. This boosted our Aframax earnings in the second quarter by around $4,000 per day compared to the peer group average, demonstrating the value contribution of our full-service lighterage business.

U.S. crude oil exports are projected to continue to rise over the next 18 months, as new pipeline capacity linking the Permian Basin to the U.S. Gulf Coast is completed. As shown by the chart on this slide, U.S. crude oil exports are anticipated to reach 4 million barrels per day by the end of this year and could rise to as high as 5 million barrels per day by the end of 2020. This should be positive for midsize tanker demand due to the further increase in both Aframax lightering demand and direct exports to Europe on Aframax and Suezmax vessels.

Turning to Slide 6. As discussed earlier, normal seasonality and near-term headwinds have impacted our rates to the early part of the third quarter to date. Based on approximately 37% of spot revenue days booked, Teekay Tankers' third quarter-to-date Suezmax and Aframax bookings have averaged approximately $15,600 and $12,800 per day, respectively. For our LR2 segment, with approximately 32% of spot revenue days booked, third quarter-to-date bookings have averaged approximately $12,200 per day.

However, turning to Slide 7. Market fundamentals point towards a tightening of supply and demand drivers through the latter part of 2019, which is anticipated to lead to increased volatility, which typically moves freight rates higher.

Starting with demand, we continue to see several positive factors, which will help drive a tanker market recovery in the coming months. Global refinery throughput is projected to be 2.4 million barrels per day higher in the second half of this year. This should create a significant uplift for crude tanker demand. In addition, a boost from the upcoming IMO 2020 regulations may also lead to new trade patterns and arbitrage movements, floating storage and increased port congestion. Higher U.S. crude oil exports, as detailed in the previous slide, should also be a positive factor, as new Permian Basin pipelines come online in the coming months. We do also acknowledge, however, that some of the demand-side factors look less positive than at the start of the year. Global oil demand estimates have been revised down to 1.1 million barrels per day in 2019. However, the IEA projects a rebound to 1.4 million barrels per day demand growth for next year.

OPEC's decision to extend supply cuts through to March 2020 is also a negative for near-term crude tanker demand, although it should be noted that Saudi Arabia is currently producing around 0.5 million barrels per day, below their agreed production target, which gives them scope to increase supply without having to revisit their official policy.

Finally, the impact of U.S. sanctions on Venezuela continues to have a negative impact on midsize tanker market in the U.S. Gulf carriage market.

Turning to fleet supply. The next 2 years looks set to be a period of low fleet growth due to a shrinking order book, which currently stands at just under 9% of the existing fleet size, the lowest since 1997.

Shipyards are currently booked through to mid-2021, which gives us a 2-year runway, where fleet growth is expected to be only around 2% versus a historical average of around 5%. Fleet growth could be further down in coming months by an increase in off-hire time as vessels are taken out of service to retrofit scrubbers. The one negative is that tanker scrapping has been lower than anticipated in the first half of the year, which is leading to slightly higher fleet growth so far than was forecast.

Turning to Slide 8. We look at our tanker fleet utilization forecast out to 2020. We have updated our outlook based on the changes to the supply and demand factors identified in the last slide. While this has led to a slight downward revision to our forecast, it should be highlighted that utilization rates around 86% or higher generally reflects tight market conditions, which should lead to an improved market developing through 2020 with tanker fleet utilization approaching the 90% mark.

Tanker market fundamentals continue to support market recovery in the latter part of the year. And with a healthy liquidity position and significant operating leverage, we believe Teekay Tankers is well positioned to benefit from improving market conditions over the coming year.

Turning to Slide 9. Before we open the line for questions and answers, I would like to invite you to Teekay Tankers' Investors Day at the Grand Hyatt Hotel in New York on October 2, where the management of Teekay Tankers will provide an update on the strategy and outlook for our business as well as an in-depth review of our outlook for the crude tanker shipping market. Registration starts at 08:00 a.m, Eastern Time, with presentations between 8:30 a.m. and 11:30 a.m. Eastern, followed by one-on-one meetings. Please RSVP at the link on Slide 9. If you would like to have one-on-one meetings, please contact Emily Yee at emily.yee@teekay.com. We look forward to seeing you all there.

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

We'll take our first question from Jon Chappell of Evercore.

I want to start with Slide 5 on the lightering, I think it's really interesting, the $4,000 number that you noted and you showed here on the slide. A couple of questions on this. So with the pipeline capacity building out, I'm trying to understand the competitive landscape and the opportunity for Teekay as far as lightering is concerned. Is there enough capacity in your fleet or in the broader lightering fleet to meet the new pipeline capacity? And then also, part 2, is there any consolidation opportunities within that segment? It's a little bit more under the radar than we're used to in international shipping.

I think if you look at the volumes we're seeing in the lightering space, it's a combination of both import and export volumes that we see. Over the last year, the -- obviously, due to the OPEC customer seeing the import volumes reduce slightly and our balance between the 2 has driven more towards a higher percentage being export. With the pipeline capacity coming on, obviously, that portion of the business on the reverse lighterings is expected to grow. What we are looking at is, as we balance our overall Aframax portfolio, at the moment, we are probably weighted 50-50 between Eastern markets and Western markets. But as we see more volume coming out of the U.S. Gulf and the premium that we get out of the lighterage business, you'll probably see a start to position more shifts towards the Atlantic and specifically, the U.S. Gulf to try and support that market. We also have the added lever to pull, but you have seen us do this year as well as in previous years where we can supplement our fleet by in-chartering third-party vessels. And we can do that either by putting them directly into the lightering trade or by exchanging the ships that we pull out of another market, so we maintain a presence in those other markets while bolstering our Teekay presence in the U.S. Gulf.

Okay. With that ability, you don't think there's any bottlenecks potentially from the lightering side to kind of maximize the exports from the U.S. if the -- once those pipelines come out?

Well, I think the -- like any pipeline project, they will come out at different times, and some may get delayed. They'll certainly open up the bottlenecks that have been existing recently. I think production-wise, earlier in the year, we saw a buildup of inventories around the Cushing area, a lot of that was due to pipeline capacity not being there. I think as that plays out, we should start to see a lot more of the oil move.

I think in terms of shipping bottlenecks. Obviously, as more exports come out as more ships transit in and out of port, the infrastructure in the U.S. Gulf River system is fairly congested. And that may lead to further logistical delays, which eats into tanker supply, which is good for us.

Okay. And I'm sorry, I cut you off. You might have been answering the potential consolidation opportunities in the lightering business.

Yes. Short answer, really. It's not a big market. It's a very niche market with only a couple of players in it. And while we have good cooperation around maximizing the utilization of our fleets, at this point, I don't see that being taken any further.

Okay. Final one, maybe for Christian and, if I may. Reading the press release, there were 2 kind of supply/demand things set out to me. One was the big ramp in the IA, which we've kind of been talking about that as well. And how do you think about the refinery run increase sequentially, second half, first half, amid -- kind of what you guys talked about a minus sign with falling demand?

And then, I'll add my second one now, and then turn it over to you. The order book being at 97 levels is obviously incredibly appealing. However, you also mentioned in the first half, delivery schedule being the greatest, I think, since 2011 for a 6-month period. So how do you think about the timing of absorbing that into kind of the demand environment that we're looking at?

Yes, Jon. Taking your first one on the refinery runs. I think what we saw in the first half of the year, and especially Q2, I think it spills over a little bit into early part of Q3 with some very heavy refinery maintenance. But we also saw some pretty low refining margins during Q2, especially in Asia, around April-May time. And I think that did lead to very low refinery throughput, which is set through to the lower tanker rates that we're now seeing in the early part of Q3.

But I think there are some encouraging signs there for the second half of the year. Refining margins in Asia have recovered. Just at the end of July, actually might hit a 2-year high. So we would certainly expect refinery runs in Asia to start ramping up. And that period of maintenance is coming to an end as well. So we feel fairly confident that refinery throughput is going to be significantly higher in the second half of the year versus the first half of the year and that should provide extra tanker demand.

So as I say, we -- in the prepared remarks, we do feel that the fundamentals on the demand side will improve. And we haven't seen that kind of IMO 2020 bunch heavy, which we think will still come in the second half of the year because refineries will have to start getting a fairly high utilization levels in order to produce efficient low sulfur diesel.

With regards to your second point on the order book. Yes, I think what we've had is kind of a year of 2 halves. So the first year -- first half year was definitely very high fleet growth with all of the order book delivering in the first half of the year. And we've had very little tanker scrapping as well. And I think that's also contributing to some of the lower rates that we're seeing right now is just -- it takes time to absorb that capacity once it comes into the fleet. But the good news looking forward is that for the next 2 years -- the shipyards are booked up for the next 2 years. The tanker order book is very low, as you pointed out. We would also expect a bit more scrapping to emerge. I think it's unrealistic to think that there is going to be no ships scrapped at all. Some ships, as they go through full spatial, the owners will decide probably to take those ships out. And as a result, we see fleet growth over the next couple of years. It's going to be 2% per year for the next 2 years. So that, again, should facilitate a tanker market recovery.

We'll take our next question from Randy Giveans of Jefferies.

So two quick questions for me. You mentioned that debt repayments. Obviously, we'll support the share price. So how do you kind of prioritize this in terms of use of free cash going forward relative to vessel acquisitions or share repurchases? I know dividends are kind of a maybe 2020 story, but in the interim, is debt paid down like 100% use of free cash going forward?

Randy, for 2019, debt repayments will be our focus. And I think as we repay some of that incremental debt that we took on in some of our liquidity initiatives over the last 2 years, moving into 2020, we have more flexibility with our capital allocation. And I think then we'll look for -- we'll look at different opportunities to allocate that depending on where our shares are trading. And what we see as our dividend capacity at that time. So I think into 2020, we'll start to look at different options aside from dividend -- pardon me, aside from debt repayments.

Okay. And then kind of looking at your fleet, you have, maybe, I don't know, 10 to 12 vessels or so over 15 years of age. Are you thinking of possible -- possibly selling some of those to further accelerate that strategy of delevering the balance sheet?

Yes. I think, obviously -- I think I answered this on the previous quarter. We don't want to be selling tankers at the bottom of the market, but certainly as the market picks up and asset value starts to increase, we will be looking at our fleet composition and looking to take advantage of the higher asset prices by selling off some of those units that don't fit the portfolio. So yes, it's part of the strategy.

All right. And then one specific question for your IMO strategy. Obviously, no scrubbers on order, do you plan on burning MGO next year or you switch to some of the VLSFO blends, despite some possible compatibility concerns?

And then with that, when do you plan on cleaning out your tanks to switch from your kind of current HSFO to that more MGO or VLSFO?

That's a good question. We -- over the last, really, 2 years have really been gearing up to face this IMO implementation on January 1. So I think in terms of what kind of yield we burn, we purchased fuel in 70 different locations around the world last year. So we've really had to approach this with flexibility in mind. So what we're looking to do is stem both the low sulfur products that are out there as well -- sorry, the low sulfur fuel oils that are out there as well as MGO depending on the availability in various locations. We've made tank modifications to accommodate that. And also in our bunker supply contracting, we're looking to make sure that we have access to both grades. In terms of the compatibility on the low sulfur fuels, that's where the tank modifications have come in, and we're fairly comfortable now in terms of our readiness to adopt those new fuel types without affecting the operation of the ships. Sorry, and what was your -- the second half part of your question?

Just kind of the timing of cleaning out your tanks to switch from HSFO to the VLSFO or the new fuel?

Yes. It will depend on the class of ship, obviously, with Suezmax is running on much longer voyages, we're going to have to start to put on the lower sulfur grades earlier than maybe the Aframax is that we can push closer towards the back end of the year. But you're probably looking at stemming the bunkers in the late Q3, early Q4 period. As a start, for those ships, they are doing long West Africa or U.S. Gulf to China runs.

We'll take our next question from Ken Hoexter of Bank of America.

Just wanted to follow up, I guess, what -- a real quick one on the time charter-in that are expiring. Should we just presume you're releasing those vessels and shrinking the fleet as we move through the rest of this year as well?

We tend to look at our time charter-in portfolio opportunistically. So if the owners of those ships are willing to extend at reasonable levels where we think we can make a margin, we'll certainly entertain that. And not necessarily just default to a release of the vessel because of the expiry. We're always looking for opportunities. And if we've got a good relationship with a good operating vessel, we obviously start having talks with the owners prior to the end of the charters. But if we can't come to terms that we think are economically advantageous to us, then yes, certainly, you'll see those ships roll off.

Okay. Helpful. And then maybe just your thoughts on the timing for the scrubbing benefit to pricing. Obviously, you know that vessels are going to start getting laid up for the insulation on the market? I know you've got no plans, you said. But when do you start to see that? Is that kind of more a third quarter, fourth quarter timing? Or do you not think it really -- it's until the demand for new fuel into the beginning of 2020?

Well, I think we certainly haven't seen a lot of vessels being taken out so far this year, which I think speaks to some of our enthusiasm for where the market will start to pick up later in the year because most owners that we have spoke to have indicated that they will have the scrubbers on board and ready for January 1. So there is an awful lot of ships that need to go into dry dock across the VLCC, Suezmax, Aframax fleets. So you could see a significant impact in the 2% range of fleet supply that gets taken out between now and Christmas in order for those scrubbers to get fitted, which certainly helped the supply-demand balance that we're looking at.

Is there enough yard capacity from your view to get that done?

I think the yard capacity is certainly tightening. We, as you can see on our supporting documentation, have had a fairly busy dry docking year this year. And although the early part of the year, dry docks or securing dry dock capacity has been relatively easy. I think it's going to get more challenging as we get into the later part of the year. So we've sort of front run that and made sure that our -- through our relationships and our contracts with the yards that we are confident, our ships are going to get in.

Helpful. And just the last one for Kevin or Christian, but where does your outlook go wrong, I guess, when you think about the excess supply that's still out there? I think John was talking about this earlier, but given the lack of retirements, what do you view as shifting? What could shift that, I guess, positive rate inflection that you anticipate?

I don't think it's -- you can really speak to one thing that's going to drive it one way or the other. I think, historically, the tanker market, it's always been a combination of events or of headwinds or of tailwinds that have either boosted or dragged on the market.

As Christian pointed out in his previous answer, I think we've got refining margins that are improving. You've got IMO demand that needs to kick in. There's a lot of positive factors that are going to contribute. But certainly, if owners decide not to scrap and try and trade a vessel into its 21st, 22nd years, then that could adjust the balance. And I think that's why you've seen us in our presentation look at both the positives and the negatives, and we look at our utilization figures and adjust them slightly downwards. But I think we still are confident that the way the majority of drivers in the industry are moving, utilization rates should pick up as we move through this year and into next year and that should be positive for rates.

At this time, we have no further questions. I'll turn it back to Kevin Mackay for closing remarks.

Thank you for joining us today, and we look forward to seeing you in October at our Investor Day. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.