Welcome to Teekay Tankers Ltd's First Quarter 2023 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.

Before we begin, I would like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the first quarter 2023 earnings presentation. Kevin and 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 first quarter 2023 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Mackay, Teekay Tankers' President and CEO, to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers First Quarter 2020 Earnings Conference Call. Joining me on the call today are Stewart Andrade, Teekay Tankers' CFO; and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted EBITDA of approximately $206 million in the first quarter, an increase of approximately $26 million in the fourth quarter of 2022. We reported our highest ever quarterly adjusted net income of nearly $175 million or $5.13 per share, an increase from a record fourth quarter of 2022 adjusted net income of approximately $148 million or $4.36 per share. Our strong results have enabled us to reduce our net debt by almost 50% since last quarter to $182 million. We've also finalized our revolving credit facility for up to $350 million to refinance 19 vessels as we continue to exercise purchase options on vessels and sale-leaseback arrangements. The strong third quarter spot rates and our high operational leverage, Teekay Tankers generated almost $194 million of free cash flow, including approximately $19 million from our 80-invedels. As previously mentioned, for every $5,000 above our free cash flow breakeven of approximately $15,000 per day, we expect to generate $2.64 in free cash per share annually. Given the substantial progress the company has made in building financial strength and how well we are positioned to benefit in a strong tanker market, Teekay Tankers has transitioned to a capital allocation approach under which our existing focus on financial strength and disciplined future fleet reinvestment is supplemented by returning capital to shareholders. Namely, from this quarter, we have initiated a fixed quarterly dividend of $0.25 per share. In addition, based upon a holistic assessment of the company's position,…

Thanks, Kevin. Turning to Slide 9. We highlight the company's high operating leverage and what that means for TNK's capacity to generate cash flow and create shareholder value in a strong tanker market. With 96% of our fleet trading in a firm spot market, our earnings in recent quarters demonstrates the power of having 51 vessels trading in the spot market, generating significant free cash flow. As an illustration of that, if Q1 2023 spot rates continue for the full year, we would generate approximately $24 per share of annual free cash flow, equating to a free cash flow yield of over 60%. Our strong cash flows have been used to strengthen TNK for the long term by rapidly paying down debt. In addition, they've allowed us to optimize our capital structure by exercising purchase options on vessels we had previously put into sale leaseback financing agreements. By Q4, we expect this optimization to have reduced our breakeven rate by approximately $400 per day. Turning to Slide 10. We look at Teekay Tankers' updated capital allocation plan. As we have previously communicated, throughout 2022, our capital allocation was focused on building balance sheet strength, and I'm pleased that we have made excellent progress in that regard. Since the beginning of 2022, we have generated over $480 million of free cash flow, reduced our net debt by over $400 million to $182 million and reduced our net debt to balance sheet capitalization from about 40% to less than 13%. Highly supportive market conditions and our operating leverage enabled us to accelerate our progress, and we are now pleased to revise our capital allocation plan. Our updated capital allocation plan will maintain a focus on building financial strength for future fleet reinvestments when market conditions are supportive. In addition, we are initiating a $0.25 per share fixed dividend. This dividend enables us to continue building financial strength while also consistently providing a return of capital to our shareholders. A holistic assessment that considered the company's performance in recent quarters and our outstanding progress in building financial strength, combined with our tanker market outlook and the company's future capital needs resulted in the board declaring a special dividend of $1 per share. While it is not our intention to utilize special dividends as a regular recurring supplement to our fixed quarterly dividend, we have chosen to do so at this time, providing not just immediate value to our shareholders, but also establishing a further means by which TNK can optimize its capital allocation. Finally, we have put in place a $100 million share repurchase program, which provides us with another capital allocation tool, enabling us to act opportunistically to take advantage of equity market dislocations when TNK has excess capital. I will now turn the call back to Kevin to conclude.

Thanks, Stewart. In summary, Teekay Tankers is in a great position with our sizable fleet of well-maintained quality Aframax LR2 and Suezmax tankers to benefit from the strong tailwinds supporting the midsized tank market. Robust tanker market fundamentals indicate multiyear support for a healthy tanker market environment, which should enable us to continue creating shareholder value by generating meaningful cash flows, returning capital to shareholders and seeking opportunities to reinvest in our business and fleet in a disciplined manner. With that, operator, we are now available to take questions.

[Operator Instructions] With that, we'll go ahead and take our first question from Jon Chappell with Evercore ISI.

Before I start, I make a point not to pander on these calls, but I have to say after several quarters of questions around your capital allocation. It's great to see a result there, and that's really great. So congrats on that. Stewart, if I could start with you, a lot of the work that you've done on the balance sheet has put you in this position now to change the capital allocation strategy. 19 vessels that you've taken back from sale and leaseback that will be done, I guess, by the third quarter of '23. Can you just remind us how many would remain then starting in the fourth quarter under the sale and leaseback arrangements. And again, any timing on the ability to exercise options to end that structure as well.

Jon, yes, thank you very much. We will have 8 vessels left in sale-leaseback structures as of the end of the year, and those come up with purchase options available in -- towards the end of Q1 2024. So we'll be in a position if we think appropriate to buy those ones back to early next year. There will be 8 remaining in total under sale leasebacks at the end of this year. And all 8 of those will be done by one -- you have the option to do all 8 of those by the end of 1Q '24, so within 12 months. Yes. in March 2024, we have purchase options on all 8 of them.

Okay. Great. Kevin, for you, you mentioned the volatility. And obviously, there has been a lot of volatility in headline volatility, so to speak, as well. But it seems that every time we kind of get a little mark-to-market update, it's like the VLCCs and the MRs, kind of the barbell have been more extreme, where the Suezmaxes and the Aframaxes although they have been volatile by definition, at a much higher range and a much tighter range. What do you ascribe that to? And is it strictly the most direct beneficiaries of a lot of the kind of redrawing of the trade map have been those 2 midsized crude asset classes? And do you think that, that kind of sets a stage for a higher high and higher low scenario within those 2 specific segments going forward?

Jon, thank you for your comments earlier. Yes, it's interesting when you talk about volatility, and you've compared the barbells of Vs and MRs. If you just -- if you look at Aframax, if you want volatility, we were bouncing along only 10 days ago at around about OpEx levels and now we're over $120,000 a day in the U.S. Gulf. It's -- that's volatility. But I think it's -- we're seeing across all segments, not just at the bookends. But I think on average, what we are seeing is the aggregated monthly numbers or the quarterly numbers for the midsized tankers specifically Aframax and Suezmax. I just held up stronger and I think that speaks to the direct impact that these new trade routes as a result of the Ukrainian war, has really been focused on a more flexible vessel that the Aframax and Suezmax presents. I said in my remarks, we don't take part in the Russia trade directly but it's causing a dislocation while others use to go there is drawing them away from the traditional market. And our concentration in the U.S. Gulf in our layering business in the Atlantic as well as the Far East has helped us to keep the Aframax presence in the Aframax market when it does spike to give us the kind of returns that we're demonstrating on this call today. Yes, I think the long story, it really is the last 12 months have really been a story about the midsized tankers, not so much all sectors all at the same time. They've had periods of strength. But I think as I mentioned in my remarks, the OPEC cuts are going to primarily affect the OCC. I think the Aframax is a surface on a sentiment basis may be impacted on a tonne mile basis, may continue to be strong for the rest of the summer and into certainly the Q4.

And we'll go ahead and move on to our next question from Omar Nokta with Jefferies.

Kevin, Stewart. Maybe just to touch a Hedrin from my angle as well. I would say congrats because you guys set off on this strategic approach maybe at least 5 or 6 years ago looking to balance or strengthen the balance sheet, and you really ignored a lot of risks of taking advantage of uplift that we saw in 2019, 2020, you just tout the course of QR now. We've got Tatanka this position of being almost in a net cash situation. So kudos to you guys did want to ask about clearly, it's you have the buyback, you've got the special that you just declared and you've got the ongoing $0.25 dividend. You're still just based off of the way this market is, you're generating a lot of free cash flow. How are you thinking about how that free cash gets utilized? Obviously, you just announced this capital allocation. So I'm not expecting you to just start talking about what to do with the excess cash. But just in general, how do you think about that free cash as it gets generated. Is that just go straight to the balance sheet? You're -- effectively, your debt is almost gone. So does the cash just build? Or do you now start to look at acquisitions and fleet renewal.

Thanks for the comments, Omar. And yes, we're very happy with the progress we've made over the last few years, and we think we're in a good position. In terms of the excess cash flow that we'll generate, I do expect that the tanker market stays strong, that we'll quickly find ourselves in a net cash position. And as we mentioned in our prepared remarks, it's really with an eye to making disciplined reinvestments in our fleet as we go forward. We can step back a little bit now and look at a bit more of a longer-term view of what's going on with the company over the last several years. And we try to be very disciplined and focused on building our balance sheet strength, and we haven't invested in the tanker since the end of 2017 -- and so we do need to reinvest, but we're going to be very disciplined as we do that. But going forward, we want to continue to operate from a position of balance sheet strength, which means it will require a fair amount of equity in order to make those reinvestments. So we'll be patient. We'll look for opportunities. And when those opportunities arise, we'll be -- we think we'll be positioned to take advantage of them.

That's good. And I guess just in terms of those opportunities, I don't want to press too much because you do have the flexibility to not take your time. But in terms of state fleet additions, you can do the charter ins as you've done here recently. You can buy ships out in the open market or you can order new ones. Euronav earlier this morning had mentioned looking at new buildings within the Suezmax segment. How are you guys looking at new buildings in general? Is that something that is compelling at this point? Or if you were to put capital to work, is it more towards secondhand or do you continue with the in-charter approach?

Omar, yes, and thanks as well for the comments. I think we've said this before. We -- when it comes to our fleet renewal task, it's -- we're really agnostic. Historically, TNK has bought secondhand ships. It's ordered new ships and it's done M&A. And I don't think that changes going forward. The challenge at the moment is, in our view, newbuilding prices relative to historic terms are expensive as to our secondhand value. So obviously, different owners have different views. But from where we sit, we're not -- we don't have plans on our books right now to go into the new build market at these kind of price levels.

And maybe just one final follow-up. Just on the new credit facility, the $350 million that will refinance the 19 leaseback vessels. You're going to be winding those down obviously over the next couple of quarters. How much of that $350 million are you expecting to draw initially for the full -- once you paid off the leases on the '19.

Well, it depend on cash flow goes into Q3 and Q4, but we are able to reacquire the vessels from the sale-leaseback arrangements initially with just a small draw on our existing revolver and not drawing anything on the $350 million. So it will be either a very small draw on the existing $90 million revolver or nothing. So -- if we continue to see strong cash flows into Q3 and Q4, I would expect that we wouldn't need to draw anything.

And our next question is going to come from Ken Hoexter with Bank of America.

Great. And again, I'll echo congrats on the reshaping of the balance sheet, great job sticking with it. Kevin or Stewart, you're 96% spot exposed. I don't know, maybe your view of how long this lasts for in terms of obviously, you're confident by sticking with the spot. Do you look for some time charter opportunities to lock in these rates? Maybe your thoughts on the longevity of this kind of market.

Yes, as we said in our prepared remarks, the way the fundamentals have set up and then we said on previous calls, the change in the trade patterns as a result of the Ukrainian war, we feel, in our opinion, are durable. So yes, we do have confidence that the spot market is going to be the best place for our assets to trade and then for us to maximize our cash flow generation. But we always keep an eye out for opportunities. We haven't seen any of late where we thought that it was worth putting vessels out. We feel we can best outperformance over the next 12 months by staying spot. But we have done some short-term 3-month deals that sort of outperformed the spot market. So we're always looking to do things. But in terms of the longer-term 12-month-plus type of deals, we don't feel that the market is rewarding us enough for committing the assets at this point in the cycle. And that's based on the confidence we have in the spot market going forward.

Great. And I guess maybe to take that one step further, right, the confidence in the order book, right? I think it was just mentioned that you're hearing some peers start to place orders. You're still looking at it as historically expensive. Does that fear of the rising eventual order book start to pressure your rates in your view? Or does that change your outlook on things as you get more carriers going in and placing orders? Or maybe just walk us through your thoughts on how you see the market panning out.

Yes. I think we recognize that there has been an uptick in ordering in recent months. But our view for the next 2 to 3 years is that we're going to enjoy a very strong period of minimal or nonexisting fleet growth. Beyond that, nobody knows. As I said, there has been an uptick. When you compare the uptick and you annualize that, probably Christian can jump in later and give us some numbers around it. But when you compare it to previous years or historical norms, the order book still isn't in large. And as long as that remains the case, we also look at where the fleet profile is for tankers, and there is a large grouping of ships that are heading towards 20 years old and beyond, but will eventually leave the fleet. And when you compare the numbers it to an order or they need to be ordered to replace that fleet, that will leave the day-to-day trading fleet. We can take a lot more organ from here before we have a large negative impact.

Great. And my last one is just with the OPEC cuts, do you see any risk of any I don't know, VLCCs pressing into the -- I know it's a different trading market, but any pressure from that pushing into the market.

Yes, it's a good question. OPEC cuts will definitely impact the lease because most of the cuts are coming out of the Middle Eastern producers with the V are actually going to look for other markets to kind of penetrate and we will see them start to move into West Africa. We have, over recent months, seen more of the LCC volumes being picked up in the U.S. Gulf going to Europe. But as we struggle for alternative markets, they will start to trade into other areas, which, in our view, as we said this, that could put a sort of a lid on how high the spot market could go in terms of the midsized tanker space. But I think, overall, our confidence is that especially for the Aframaxes, they're not a vessel that can be replaced readily, and we think that the Aframax will continue to enjoy a really strong run as of all the Suezmaxes, it's just they may be capped out a little bit where the highest don't go as high as we think in the fourth quarter during the summer. But they'll still be on a relative basis, extremely healthy return for Suezmaxes relative to historical norm.

With that, that does conclude our question-and-answer session. I would like to hand the call back over to the company for any additional or closing remarks.

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

With that, that does conclude today's call. Thank you for your participation. You may now disconnect.