Earnings Labs

Teekay Corporation (TK)

Q2 2022 Earnings Call· Thu, Aug 4, 2022

$13.14

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Transcript

Operator

Operator

Welcome to Teekay Tankers Limited Second Quarter 2022 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 the company. Please go ahead.

Unknown Executive

Analyst

Before we begin, I would like to direct all participants to our website at www.teekaytankers.com, where you will find a copy of the second quarter 2022 earnings presentation. Stewart 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 2022 earnings release and earnings presentation available on our website. I'll now turn the call over to Stewart Andrade, Teekay Tankers' CFO to begin.

Stewart Andrade

Analyst · Evercore

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers' Second Quarter 2022 Earnings Conference Call. Joining me on the call today are Christian Waldegrave, our Director of Research; and Mikkel Seidelin, Director of Chartering and Freight Trading. Kevin is attending to a personal matter at the moment, but sends his best. For today, I will be leading the call. Moving to our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $58 million in the second quarter of 2022, an increase of approximately $41 million from the first quarter of 2022. We reported an adjusted net income of nearly $26 million or $0.76 per share during the second quarter, an improvement from an adjusted net loss of $14 million or $0.41 per share in the prior quarter. Our improved results quarter-over-quarter were primarily due to higher spot tanker rates. In the improving tanker market environment, which I will address shortly, Teekay Tankers is benefiting from our high operating leverage with 49 vessels currently trading in the spot market. This is enabling us to strengthen our balance sheet after weathering almost 2 years of a weak tanker market. Both our liquidity and our balance sheet leverage are moving in the right direction, and that remains a key focus for us. Oil supply chain disruptions related to Russia's invasion of Ukraine are proving to be durable with new oil supply chains now established and marked by significantly longer average voyages, particularly for midsized tankers. Volatility in the market has been pronounced and continuous driving average rates higher. With 98% of our fleet trading in the spot market, we are well positioned to maximize results in the strengthening tanker market environment. At the same time, it is important…

Operator

Operator

[Operator Instructions] We take our first question from Jon Chappell with Evercore.

Jonathan Chappell

Analyst · Evercore

Stewart, on that last slide you just walked through. I mean you've been able to really deleverage the balance sheet through a very difficult market, given some of the initiatives you put in place in 2019, even before the pandemic and now you have this accelerating free cash flow. What's the level that you want to get to, whether it's net debt to balance sheet cap or to EBITDA? How much more do you need to do based on what you see in the market today to kind of pivot a little bit more to some of those opportunistic things you spoke about or back to the good old days of Teekay Tankers resuming kind of capital return?

Stewart Andrade

Analyst · Evercore

Jon, yes, good question. So if you look at the chart on Page 8, you can see that in 2020, we were then to net debt to cap in the low 30s. And in fact, that's the end of 2020. Mid-2020, we were probably about 30%. So I would say that our first work that we have ahead of us is to get our leverage levels down to those kind of -- that kind of level. As you said, there's a lot of different metrics that we could use, but using net debt to cap is as probably as good as any. So I would say the first step is to try and get down to our 2020 levels that's in the 30% zone. And then we can -- then we'll start thinking about other uses of capital. And part of that is looking at the long term and our needs for fleet renewal, the ability to act opportunistically on opportunities as they come down the pike to be aggressive within charters if the market presents those opportunities. So we don't have a magic number that we're trying to get to. We do think, ultimately, the financial strength is the best way for us to create value for shareholders. And as we saw in the recent 2 years, even though our leverage was quite low in 2020, we had done a good job in reducing leverage in 2020. We and the rest of the tanker market were already in a position where the concept of liquidity and leverage levels had come to be a concern again. So we know in the tanker market, there can be that cyclicality, and we want to make sure that, that our strong financial position, make sure that we're always in a position to take advantage of opportunities as opposed to taking steps that could damage shareholder value.

Jonathan Chappell

Analyst · Evercore

Okay. That makes sense. And then from the opportunistic standpoint, I mean, you're still selling older ships and you still have a few legacy in your fleet, asset value is certainly inflected. So I think no one would fault you for that. But how do you kind of align modernizing the fleet through more modern assets, again, when the asset values are starting to run away? I mean do you have to be more disciplined when you think about adding more modern tonnage at these prices, especially before you get to maybe a true inflection in the earnings or the cash flow?

Stewart Andrade

Analyst · Evercore

Yes. So I mean, I guess, first of all, maybe talk a little bit about our fleet. So we've got 50 vessels right now, 49 of them was spot rate exposure. Our -- as you've seen in our percentage fix in our Q2 results, our vessels are doing very well and generating a lot of cash flow. So we really like our fleet. And from a perspective of the amount of capital that we have invested relative to the cash flow that they can generate, we think that we're almost ideally positioned in this period of what we expect to be a strong tanker market. But of course, we do have to have our eye forward on fleet renewal as well. And the word you used there, I think, is important, and that's disciplined, and we do want to be disciplined about how we look at fleet renewal, making significant number of acquisitions at the top of the market is a dangerous thing to do for any tanker market. Of course, on a portfolio basis, we could bring some ships in. The 50 tanker fleet, if we added a few vessels at different points in the cycle, that can still be the right thing to do. But I wouldn't expect significant acquisitions at the top of the market from us. And I think in the meantime, we'll just enjoying what we hope will be strong cash flows from the existing fleet and being patient.

Jonathan Chappell

Analyst · Evercore

Okay. That makes sense. One more, if I may, for Christian. The Slide 6 is great. It lays out pretty simply the trade flows. And I think we're not even kind of there yet because sanctions haven't truly kicked in yet. But as we look at these new trade routes that you've laid out here, obviously, the midsized crude carriers have been direct beneficiaries and immediate beneficiaries of some of the new trading routes. At some point, the VLCCs start to benefit as well, either from the impact of sanctions or from just cannibalization of some of the midsized routes?

Christian Waldegrave

Analyst · Evercore

Yes. Jon, like you pointed out, I think the benefit that we've seen so far have really been on the midsize because of the regions impacted. So obviously, these can't trade into the Baltic or into the Black Sea. So where we've seen change in trade patterns and stuff going longer haul, it's really helped the midsize. As you've pointed out, the VLCCs have been lagging. And I think that's more a factor of obviously, Chinese import demand has slowed down or did slow down in Q2 with COVID lockdowns. And I think with a strongly backwardated oil market that we've had in recent months as well, it kind of disincentivizes the long-haul movements from the Atlantic into the Pacific. But I think both of those are sort of slowly changing. I think Chinese demand is starting to come up again now. It's not necessarily being reflected in higher imports yet. But I think as China continues to recover from COVID and demand increases through the balance of this year and into next year, I certainly think we'll start to see more volume flowing into China, which is naturally a VLCC trade. And then also, if you look further ahead, there's not a ton of spare supply capacity in OpEx. So where the oil supply is going to come online increasingly over the next sort of 12 to 18 months is going to be Atlantic Basin. There's going to be more U.S. production and exports more from Brazil and Guyana. And so again, if we start to see some more of those long-haul barrels moving again, then that will again sort of kick-start the VLCC market. So I'm not sure that these will really be a big beneficiaries of the change in trade patterns as a result of Russia. But I do think as China comes back and we start to see those long-haul movements again, that will bring up the rates. And then if we have a healthy VLCC market, it's going to help the rest of the tanker market as well.

Operator

Operator

We take our next question from Omar Nokta with Jefferies.

Omar Nokta

Analyst · Jefferies

Just wanted to follow-up on Jon's sort of line of questioning regarding the fleet and potential renewals and the leverage. Stewart, you mentioned your net debt to cap being around 39% and trying to get it to where you were before around that 30% level. It does feel like we're on that path here, and you may be able to achieve that before year-end. But also maybe just judging maybe from your body language or via the audio, it does sound like maybe you aren't itching to pull the trigger on anything just yet. Is there something else beyond just the leverage ratio that you're looking at that's going to indicate whether you're ready to start the next wave of Teekay Tankers' life cycle?

Stewart Andrade

Analyst · Jefferies

Yes, that's a good question. And clearly, we look at more than just the leverage number and trying to decide how we're going to gauge capital allocation. We look at the tanker market, how long we think the cycle will last, our view on how much cash flow we'll be making in the forward years. We look at the opportunities that we think may be presenting themselves to us in terms of where asset values would be and when we might want to invest. And we also look at the -- our fleet profile and look at fleet renewal. So as you've seen over the last couple of years, we have been selling some of our older tankers sort of 2003- to 2005-built tankers. We're not big sellers of tankers at the moment. Obviously, we sold one. We agreed to sell one during the quarter for almost $25 million, which is a very firm price and made a lot of sense, and we brought in a time charter to balance that off to keep our market exposure. But -- so we're looking at all of those factors and trying to decide where we think our leverage should be. And again, maybe just walking through it as you've asked the question, the first line is that we want to make sure or do our best to make sure we're not in a position where if the market does turn or whenever the market turns that we're not needing to take actions that harm shareholder value, whether that's raising capital at expensive rates or divesting of assets that we'd rather not divest at lower levels. And then the next line, I suppose, is to make sure that we have the capital on hand to be opportunistic and do deals when they present themselves if we think that they'll add shareholder value. And then I guess the third one ultimately is to be able to act countercyclically to make investments at the best time. And we look at all of those things in trying to judge how much leverage we think we should carry and how much higher power we should have. So definitely one of our eyes is looking forward toward eventual fleet renewal and judging how much capital we need to think about having in order to do that as well. In the meantime, as highlighted on the slide with our free cash flow yield, every dollar of cash flow that we generate above that breakeven level goes to creating NAV, which creates shareholder value. So we are -- we see that paying down debt is a way to create shareholder value. We think that creates value in the enterprise. And ultimately, hopefully, as cash flows increase across the tanker market, the equity markets will also recognize that and hopefully start to reward companies in the space.

Omar Nokta

Analyst · Jefferies

That's very well said and detailed and agree with you, definitely paying down debt is -- there's nothing wrong with that. And I guess just what you mentioned about the Aframax that you sold. I guess that's pretty much it, you think at this point, if you were to characterize Teekay Tankers going forward, it's not really a seller. It's kind of at this point, harvesting the existing fleet?

Stewart Andrade

Analyst · Jefferies

Yes, I would say that primarily harvesting the existing fleet is where we're focused. But to be honest, before we sold that tanker, I wouldn't have characterized us as sellers either. But depending on the position of a vessel, its particular characteristics and what a buyer is looking for, opportunities can present themselves that are compelling. So again, in this case, we did what we consider to be a really great trade, which is -- we sold the tanker that had about 3 years of trading life at extremely firm rate. And we brought in a 2-year time charter to kind of replace those spot days. So we find ourselves sort of net-net, not in a materially different position from our exposure to the spot market, but with being able to crystallize a very firm value. So I would say that we're not sellers at the moment, but we are always looking for opportunities to add value through doing different sorts of trades.

Omar Nokta

Analyst · Jefferies

Okay. And maybe just one final follow-up. A lot of times when we talk about TNK, investors ask about dividend potential. And if I'm just hearing you right, dividends obviously would be nice. And I think Jon mentioned the good old days, it would be great, obviously, to have a dividend policy, but it sounds like here, first and foremost, strengthen the balance sheet that you've got an [indiscernible] in modernizing the fleet, that is modernizing the fleet. Once you get to that point where you're ready to now deploy capital differently, it's really about strengthening the fleet profile. And then after you've done that, it's return capital to shareholders.

Stewart Andrade

Analyst · Jefferies

Well, I don't want to sort of predict what the future will hold. We could be in a run here, a multiyear run, which sees very firm rates, high cash flows and high asset values for a sustained period of time or some of the things that we've discussed in terms of macro risk could come to bear, which could mean we have great cash flows for a year or 2 and then the market gets softer for something that we haven't seen or an unforeseen event. So it's -- I don't want to get in a position. It's the tanker market. I don't want to get in a position of predicting the future. What I would say is that for the time being, we want to reduce our debt levels. We're considering all the things I mentioned earlier in terms of capital allocation in our forward view of the market. And we'll continue to try and make the decisions that we think will ultimately add the most shareholder value. But we're not sort of dogmatic in our view of how it needs to be done. We need to be dynamic and kind of monitor the market and our forward view.

Operator

Operator

[Operator Instructions] We take our next question from Ken Hoexter with Bank of America.

Ken Hoexter

Analyst · Bank of America

Great. And safe travels to Kevin. What gets you at this point to consider moving to charters from spot? Is that something Teekay will look at if rates start to get to certain levels? Are there levels you would talk about? And maybe talk about how negotiations are going with customers?

Stewart Andrade

Analyst · Bank of America

Yes. So there isn't a magic level. So whenever we're looking at time chartering vessels out and in for that matter, we look at our -- the overall portfolio, how much spot rate exposure we have and our forward view of the market and we look for opportunities where perhaps we can lock in rates that are higher than -- either higher than where we see the forward market being or that are compelling in relation to where we see that forward market being where we're just happy to have a hedge in place that sort of guarantees us some cash flows. And it's the same on the other side within chartering vessels looking for opportunities where we think we may be able to see windows of opportunity. So while the spot market has moved up, the actual charter that we entered into recently was an in-charter at $23,000 a day, which we think is compelling and add value. As you saw the last time the market spiked, which was more of an event-driven spike back in 2020, we were quite active in putting ships out that we thought it was -- that was a compelling opportunity. So we'll keep our eye on the time charter market. At the moment, I would say that it's -- the rates are continually stepping up for Aframaxes and Suezmaxes right now in the 2- to 3-year period. There's not a lot of liquidity in that market. There's sort of a small trickle of vessels that are being put on the market and being chartered. So not a lot of liquidity right now, but we will keep our eye on that. And if those rates continue to move up, I would expect that at some point, we would lock in a certain number of vessels. But again, that will be relative to our forward view. And as we outlined in the presentation, we feel really good about the market heading into '23, '24 and '25 based on the fundamentals.

Ken Hoexter

Analyst · Bank of America

Is there a point where Stewart, you and Kevin said we still always want to be at least, I don't know, 50%, 30% exposed to the spot market because that's who we are now, given we've played the other game in the past. Is there a new philosophy on how much you need to keep spot exposed? Or if rates get to, I don't know, pick your number, $50,000 a day, you'd say, "No, I've got a -- I'm good to lock that in for an extended period of time."

Stewart Andrade

Analyst · Bank of America

Yes. So I think -- first of all, just practically speaking, with 50 vessels and 49 of them spot at the moment, there are limitations on the amount of vessels that you can put out on time charter. There's only a certain amount of liquidity in that market. So even if we thought we were at a point in the market where we'd want to be aggressive and put vessels out, I think it would be unlikely we'd be able to put out more than half the fleet just to choose a number. So I think TNK will continue to have a healthy -- will continue to have healthy spot rate exposure and then we'll try to supplement and add value with how we position ourselves on in and out charters.

Ken Hoexter

Analyst · Bank of America

That's great. Put a parameter there. What about the asset sale you mentioned on the 2005 vessel. Was that specific to the vessel age? Was it something about the vessel? Was it just being opportunistic as you mentioned, $25 million gain? Maybe just thoughts on the -- maybe some more thoughts on the sale.

Stewart Andrade

Analyst · Bank of America

Yes. I mean, I think, first and foremost, the asset market has moved up. So when we talked to you 3 months ago versus now, asset values have moved up considerably across Aframax and Suezmax segments for sure. So I would say the underlying thing there is just that we have a firming market. For that particular sale, I think it's just a matter of the characteristics of that vessel, the buyer, where the vessel was positioned, when we could deliver it, and it all sort of came together with quite a firm number. But I think the big story there really is that the asset market has moved up, and they are really -- is really quite firm and people are paying quite high prices for mid-age and older tonnage. But I think that really speaks to people's confidence in the underlying spot market and how much cash flow they're going to be able to generate. What we've walked through on today's call in terms of our outlook for the market, I don't think it's unique to us. I think a lot of people are seeing that, and I think it's having the knock-on effect on asset values.

Ken Hoexter

Analyst · Bank of America

Great. And last one for me. Stewart, on the -- I guess, given the backdrop on the global economy, more on the container side, versus everything on your side of the table, are there -- in your discussions, are you seeing any yard fluctuations in terms of availability of openings where you could see more product or crude kind of tankers there? Or is it really firm and that is really the true number, and you're not going to see kind of slots opening for build capabilities?

Stewart Andrade

Analyst · Bank of America

Christian, do you want to take that one in terms of the current order book?

Christian Waldegrave

Analyst · Bank of America

Yes, sure. I think we're not seeing anything in terms of container orders sailing or yard spots opening up. Certainly, if you look at the chart we put on Slide 7, the shipyards are pretty full -- through halfway through '25, maybe even through to the end of '25 and certainly some shipyards are taking LNG orders through 2026. You may be able to find a few berths till late in '25, but I don't think it's going to be massive amount. So we're pretty confident still that the tanker delivery schedule in 2025 is going to be very low as it will be in 2024 as well. So we really don't see an opportunity to really order tankers in scale until 2026. So that obviously gives us a bit of runway in terms of some confidence on the very low fleet growth expectations over the next 2 to 3 years.

Operator

Operator

It appears there are no further question at this time. I would like to turn the call back to your host for any additional closing comments.

Stewart Andrade

Analyst · Evercore

Thank you for joining us today, and we look forward to speaking with you again next quarter.

Operator

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.