Welcome to Teekay Tankers Limited Second Quarter 2012 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 Limited's Chief Executive Officer. Please go ahead, sir.

Before Mr. Chan begins, I would like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the second quarter of 2012 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 second quarter of 2012 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Chan to begin.

Thanks, Kent. Hello, everyone, and thank you very much for joining us. With me here in Vancouver is Vince Lok, Teekay Tankers' Chief Financial Officer; and Peter Evensen, Teekay Corporation's CEO. During today's call, I'll be taking you through Teekay Tankers second quarter earnings results presentation which can be found on our website. Beginning with our recent highlights on Slide 3 of the presentation, we continue to pay out essentially all of our free cash flow in the form of dividends to shareholders after reserving for estimated dry dock expenses and principal repayments. In the second quarter of 2012, Teekay Tankers declared a dividend of $0.11 per share, down from $0.16 per share in the previous quarter mainly due to a weaker spot tanker market for Suezmaxes and Aframaxes, as well as a onetime transaction cost of $750,000 associated with the recent 13-vessel acquisition. Our second quarter dividend, which is our 19th consecutive quarterly dividend, will be paid out on August 27 to all shareholders of record on August 20. In June, we successfully completed the acquisition of 13 modern conventional tankers and related time-charters and debt facilities from our sponsor, Teekay Corporation, for a total purchase price of $454.2 million. The transaction has made Teekay Tankers one of the largest owners of midsized conventional tanker tonnage and has enhanced our modern fleet at a time of increasing discrimination by charterers against older tonnage. We continue to focus on tactically managing our fleet to enhance our fixed rate coverage during this period of weak tanker markets. During the second quarter, our fixed rate fleet earned an average of $20,400 per day, which is more than $3,000 per day higher than the average rate of $17,100 per day earned by our spot-traded vessels. Our ability to obtain new time-charter coverage to…

[Operator Instructions] The first question comes from Michael Webber of Wells Fargo.

Bruce, I want to jump in and talk about the charter-ins for a second. Can you maybe -- certainly, it makes sense down at this level, can you talk a little bit about the capacity you guys really realistically, have to charter in additional tonnage? And, I guess, would that mostly be within the Aframax class? Just a little bit more commentary around how you think that'll actually trend through the back half of the year.

Well, Mike, you're right, here, and certain of the segments, like Suezmax, it is harder to find in-chartered tonnage. The Aframax segment, traditionally, has had more in and out charter type activity. We have been able to do in-charters, and it really depends on timing of the market and certain owners' positions and requirements for our fixed cover. We do see capacity to define more in-charters though, and we do prefer to find them, as you can see from these, with a shorter firm period and in multiple optional extension periods, which provides the most flexibility to either add operating leverage if the market rebounds, or to just return the ship if the market doesn't.

Got you. All right, that makes sense. I mean, just in taking a look at the dividend guidance, obviously, relatively soft considering how weak the environment is here, and I know -- and you guys have gotten this question before, but considering how weak rates are, and also, the elevated level of debt of the company now following the acquisition, has there been any thought to potentially, kind of just, A, fixing that distribution level to have a little bit more of available cash to play with, to either repay some debt, or did you fix the dividend slightly above where you're trending now to maybe kind of prop up valuation a little bit?

I think our dividend policy, Mike, right now, is pretty conservative where we actually withhold for dry-dockings and for principal repayments. And there's been -- we've been pretty consistent in keeping our dividend policy as is. So, as opposed to being some of the other full payouts that doesn't withhold for any of those things, we actually withhold for that. So, in the short term here, we don't see any contemplation of change in that.

Pretty similar to what you guys said in the Investor Day. With regards to your charter coverage, you guys, just looking through the deck, I mean, you guys are running some 40% in 2013. That's obviously a bit lower than you guys typically run. But obviously, the market's pretty soft here. How do you think about kind of attacking that 2013 coverage? And would you expect that, that dividend coverage kind of comes from the Aframax segment as well?

Well, as we've seen in our track record, I think, as the year progresses, we do find opportunities to out charter. We do have certain relationships where ships will renew because their -- the customers that have them on charter can keep them in their programs. But as you say, the market is weaker, and locking in doesn't have that same type of benefit over spot rates as it had in the past, so we'll have to see how the market develops. But if we're not getting a meaningful premium over the spot market, then, locking in doesn't necessarily have the same impact as it would in the past.

Right. So, you guys would be comfortable going into 2013 with the current coverage ratio you have in place right now and just kind of seeing how it plays out.

Yes. 40% is pretty good, and there may be opportunities to do a little bit more. But it is, as we've all seen, this has kind of been the trend. Time charter rates have been coming down.

The next question comes from Jon Chappell of Evercore Partners.

Bruce, another strategy question for you, and this one on the expansion front. You're obviously still digesting the 13 ships from Teekay, but you've kind of lowered the expectations for 2013 and rightfully so, given the demand situation. I'd like to hear your thoughts about acquisition opportunities from third parties. It seems, from Teekay's call, that they are probably less willing to invest in the tanker segment right now, therefore, the warehousing option may not be available. You spoke of your liquidity in the call and the press release, and then you also mentioned at the very end, that you wouldn't need to issue equity for acquisitions. So, do you see the acquisition environment improving and do you see Teekay Tankers as kind of a standalone without Teekay's support, wading into that market to expand at the bottom of the cycle?

Yes, I mean, as we said, after the drop down that Teekay Tankers houses the franchise, is where the growth will occur. And as you say, the demand outlook for '13 is, we've lowered our expectations, but we're still fundamentally past that believe that the Tanker Market is set for a rebound with the supply coming into check and people not having the liquidity to be to be able to order ships. So we see that there are -- will be more opportunities to acquire third party ships over the next -- in the near term.

Do you think that's kind of a 2013 event, though? Do you still want to digest the 13 vessels from Teekay or are you actively looking today?

The beauty of the digestion of the ships is that it was, at least, a known transaction. So the digestion period is a little shorter. As for timing, it really -- as we've always said, if we crystal ball gaze we, of course, would buy a huge fleet the month before the market turned. But we don't have that type of visibility. I think we're going to have to weigh the benefits of finding good quality assets earlier, but knowing that they're not going to necessarily generate a huge amount of cash flow in the short term, versus waiting China find ships later, closer to a recovery, but, maybe missing it a little bit. So I mean, that's kind of always the trade off of timing.

Okay. And then, you've spoken about the time-charter in, but another one that we haven't talked about, I guess, in a couple of quarters, is probably the mortgage opportunities. You've done it with the VLCCs. They're expiring pretty soon. There's been some talk in the shipping press, and even amongst some of the ship broker community, that you may be working with a Far Eastern owner on financing a couple of VLCC Newbuildings. Do you have the capacity or the, I guess, desire, to do more of those type of mortgage opportunities?

Well, Jonathan, as we said, the mortgage opportunities were a great part to be in the capital structure, kind of during the weak period. I think right now, as time goes on, we want to have maximum operating leverage and take advantage of our cash available or cash available for distribution per share leverage, going forward. And the best way of doing that, we think is, as asset values have now fallen compared to when we did the mortgage loans, the risk return of buying assets may start to fall into the favor of buying assets as opposed to lending against them. Better upside opportunity and less downside.

Then just a couple of financial ones for Vince. First of all, you mentioned the 3 dry dockings, or Bruce mentioned the 3 dry dockings, in the third quarter, the low part of the market. Do you have an estimate for the number of off-hire days associated with that, the cost? And then also, if you could provide the vessels, since a lot of us model on a vessel-by-vessel basis, that would be helpful.

Yes. There's, as we mentioned, there's 3 vessels in the third quarter. The total number of days is about 112 days in the third quarter. And if you factor in also the additional OpEx that we usually incur during dry-docking, that impacts the third quarter dividend by about $0.02 to $0.03. And for next year, we have about 5 dry-dockings scheduled for about 170 days for 2013. In terms of the cost that we reserve, as you can see at the bottom of the table, $3.5 million of dry-dock reserved each quarter. So we basically smooth out the dry-docking cost itself each quarter. So you won't get any lumpiness in terms of the cost.

And maybe it's easier to do off the call, but do you have the days, off hand -- or the vessels, offhand, of the dry-docking ships in the third quarter?

It's the Ganges, Yamuna and Iskmati.

That's right.

I'm sorry, what was the second one?

Yamuna.

Okay. And finally, just looking through the financial statements, especially the cash flow statement in the balance sheet, I'm just wondering where the transaction falls in there? There wasn't any significant CapEx, any significant debt assumption. The vessels, as far as assets in the balance sheet, didn't move up significantly. Is that going to cross through those financial statements in the third quarter or is it something with an elimination with the Teekay?

Yes. You might recall in previous drop-down transactions between parents and daughters, that we have to apply drop-down accounting, which means that we have to re-cash the historicals of the daughter to include the historical results of those drop-down assets. So, if you look at the comparatives in the earnings release, the historicals actually include the 13 vessels, so that's why you're not seen a big change. So that's why in the last page of the earnings presentation, we provided you with a breakdown breaking out the historical results of the 13 vessels, so you can see the delta there. So, same thing on the balance sheet. Vessels and equipment would be the biggest change if you were to compare it to the pre-rate cast from last quarter. And just as a reminder, the vessels are booked on to TNK's balance sheet at historical book values, not at the purchase price. So, the increase to vessels and equipment was about $550 million. It wasn't actually based on the purchase price of $455 million.

The next question comes from Justin Yagerman of Deutsche Bank.

It's Josh Katzeff on for Justin. I just want to start off, I guess, on the charter-in opportunities, a little bit of a follow-on to Mike's questions. I guess, given your comments for operational leverage. Should we expect -- or I mean, would Teekay Tankers look to charter-in tonnage without the matching charter-out contracts?

Well, it always has the ability to hedge it against existing charter out contracts, notionally. It also depends -- it would depend on the period of the firm rate and the level of the rate because if you can get a pretty short, low firm period, lower rate in the firm period with options to extend, then you're really pricing options at a pretty low cost and ability to add operating leverage or not. So again, it's a matter of risk that we want to take on if the firm period is not hedged out as you say.

Got it. And with regard to your current time-charter coverage, is it just an issue with, I guess, availability of contracts, that, I guess, we haven't seen any Suezmax fixtures? It looks like the majority of your fixed up fleets are Aframaxes on the crude side.

Yes, we've been fixing out opportunistically where the, as you say, where the customers and where the charters have been available and where the rates have been most advantageous relative to the spot rates.

Okay. And 1 quick follow-on, on Newbuildings and potential opportunities out there. Is there a preference for a secondhand tonnage or Newbuildings, I guess, in the market? And, I guess, how do you evaluate either one of those opportunities when you think about deploying your capital?

It really comes down to math on our view of the outlook. The secondhand tonnage, depending on the quality and the age, may have good return prospects. But also, Newbuildings may have a better -- as in with Teekay and Peter's One Spirit design has more favorable bunker consumption, going forward. And so, you kind of just -- we basically come down to math and which one we can model out that has the highest potential cash flow accretion.

Got it. And with regard to, I guess, ship types, we shouldn't preclude Teekay from acquiring VLCCs?

Yes, we again, when it comes down to math and what we look at, we've always said, though, and we're pretty consistent, and we do focus on our core area, which is Aframax, coated Aframax and Suezmax. We still do believe largely in the correlation of the medium to large-sized tanker segments. And so, it's more around where we have the in-house capability and the pools to really earn more than our peers and indices. And I think we can demonstrate that in our core segments, and in the other segments, we don't have that type of track record.

Got it. And 1 quick modeling question. I guess, we saw the higher SG&A. Can you provide, maybe some guidance, on the run rate, post-acquisition, going forward?

Yes, just as a reminder, in the second quarter, we had $750,000 of onetime transaction costs. So you kind of have to back that out of the second quarter G&A. In terms of Q3 run rate, I think you're looking at about $3.5 million run rate per quarter.

The next question comes from Chris Snyder of Sidoti & Company.

My question has to do with the increased capacity, refinery capacity coming out of Russia. Can you guys just give me kind of how you guys think this will affect shipping rates as a whole, but I guess more specifically, kind of the voyage length traveled?

I mean, we kind of blend in all of the -- more than just any specific country, but the overall capacity of refining growth in general, in the Far East, is increasing -- forecasted to increase. And the capacity, especially on the U.S. East Coast, was forecasted to decline more. It still is forecasted as the older refineries aren't as good at processing the cheaper crude. So, and it's really -- there's such a dynamic refinery and clean space. We do believe there will be more long-haul product tanker movements as refineries move to places in the East, and as evidenced by other changes in the refinery system, like in Chevron in Australia, announcing recently to shutdown a refinery there, which is going to lead to more product movement. So overall, we forecast a more -- or an increase in demand for longer-haul product movement.

And the shutdown in Australia, the shutdown in refinery, do you guys also expect that to increase the voyage length as well?

Yes, I mean, it may increase the voyage length for clean. It may just replace the crude that was going -- slate that was going to Cornell [ph] before and they're going to turn it into a clean storage. So it does depend on where wet crude is dropped and where the clean is then sourced from, which is uncertain at this time. But in general, usually the clean is sourced from a further distance than where the crude was being sourced.

[Operator Instructions] The next question comes from Ken Hoexter of Merrill Lynch.

Just given the rates and thoughts on capacity that you mentioned before, can you talk about what your thoughts are in terms of near-term acquisitions? Does this mean you'd kind of take a break for a while, or using the capital that you talked about and the available liquidity, do we see something in the near term?

Again, as we said to some earlier questions, Ken, if we could time it perfectly, we would wait. Sometimes there's good opportunities, and you have to factor in the fact that you're getting a, potentially, a lower asset price given the weaker market, and still recover from the rebound in the future. So, if we had the perfect crystal ball and knew how to buy assets all right before the upturn, we would. But I don't think the current low market precludes us looking at assets now. Again, it's a matter of timing and having, potentially, more willing sellers in a period of weak markets.

And I guess, to back up to that deteriorating environment. You talked a bit about that on your remarks. Why the thought to then charter-in the capacity? Is it because you knew you could fix those rates or are you expecting to see the bottom? I just want to understand the thought there.

Sorry, Ken, you're referring to the in-chartered ship?

Yes, I am.

Yes, I guess it's because what it does is the period of the in-charter is very short, the firm period, relative to the -- our ones that we recently out-chartered. And so, what it gives out is kind of an optional upside exposure if the market does rebound strong in the winter, and if it doesn't, it just locked in a hedge spread for a short period of time, and then we would let that charter fall away. So it's really just more of a trading option strategy.

So despite your comments earlier about the deteriorating third quarter, this gets you through the third quarter, and then, the option is into the more the fourth -- first quarter as you talked about.

Exactly.

Okay, got it. The product market. Can you kind of delve into that a bit? What your thoughts are, and what you're seeing on the product side?

Well, we're seeing -- we're mostly focused, as you know, on the longer-range LR2 product market. We are seeing an improvement in rates there because of various factors, primarily due to more naphtha from the AG into the Far East. But we're also seeing East/West arbitrage of middle distillates. And we're also seeing what used to be Newbuildings coming over the yards taking those cargoes East to West. And because there's less Newbuildings being delivered, particularly in Aframaxes, those are going on, on LR2s. And so we are seeing a little bit of relative strength in that market currently. The other product tanker markets are not very good. They're back down, at or below operating cost levels. So, we just felt that, right now, in the short term, we are benefiting from being in the LR2 market, and particularly, Teekay Tankers participating in the Taurus Tankers' pool now that it owns 3 LR2s.

[Operator Instructions] There are no further questions at this time. I'll turn the conference back to Mr. Chan.

Thanks, Michelle, and thanks, everyone, for joining today.

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