Welcome to Teekay Tankers Ltd.'s First Quarter 2019 Earning Results Conference Call. During the call all participants will be in a listen-only mode. Afterwards, you will be invited to participants in a question-and-answer session. [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' Chief Executive Officer. Please go ahead, sir.

Before Kevin begins, I'd like to direct all participants to our website, www.teekaytankers.com, where you'll find a copy of our first 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 first 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 first quarter 2019 earnings conference call. With me here in Vancouver, I have Stewart Andrade, Teekay Tankers' CFO; and Christian Waldegrave, Director of Research at Teekay Tankers. Beginning with our recent highlights on Slide 3 of the presentation, Teekay Tankers generated total adjusted EBITDA of $63.4 million during the first quarter comparable to the $63 million in the previous quarter. We reported adjusted net income of $14.6 million or $0.05 per share in the first quarter, in line with the previous quarter. These strong results were driven by moderately increased crude tanker spot rates during the first quarter of 2019. However, spot tanker rates have declined since the latter half of the quarter as the market has faced a number of seasonal and other short-term headwinds. We believe these headwinds are temporary in nature and expect a significant firming in the tanker market from the second half of 2019 and into 2020. I will cover our market outlook in more detail later in the presentation. In May, we completed the previously announced sale leaseback transaction relating to two Suezmax tankers and also increased the amount available under the loan to finance the company's RSA pool management operations, which together increased liquidity by approximately $40 million. Having completed these financial initiatives, we have a strong liquidity position, which currently stands at approximately $160 million and have no plans for further financing initiatives to increase liquidity. Lastly, we continue to position Teekay Tankers to best capture value and maximize cash flow from the current and forward spot tanker markets. Recently, we chartered-out a Suezmax vessel for six months at $27,500 a day to protect against near-term weakness in this vessel class. We also in-charted an…

Thank you. [Operator Instructions] Our first question comes from Randy Giveans, Jefferies.

Howdy, gentlemen. How are you?

Good. Thanks, Randy.

A couple of quick questions for me. Just about a minute ago there, you mentioned that delevering your balance sheet is going to take priority to any dividends in 2019. Just questions around that, what about share repurchases? How do those stack up against dividends? And then also, is there a certain maybe quarterly net income level we should be looking for before you do pay out dividends? Or a certain balance sheet leverage ratio that needs to be eclipsed before you pay out dividends? Or how can I kind of quantify the timing of a dividend payment?

I think to be very clear, what we have discussed with the Board is given what we have been through over the last two years and the need to take on the additional debt that we have. We felt that as we look at 2019 as a year, it would be most prudent to reserve that – in our capital allocation, to reserve those funds directly for debt repayment. But that speaks to 2019. 2020, if the market continues to move as we anticipate it will, then obviously, we – the conversations that we have with the Board on a quarterly basis about capital allocation is going to discuss the resumption of the dividends. But we also have other avenues that we can allocate capital to and certainly share buybacks. If our share price continues to trade at a discount to its intrinsic value, it is definitely an option that we will look at as well as further deleveraging. So I think in our capital allocation discussions, we look at a whole broad range of options that are available to us. But we felt that given the current market, we've only really had two good quarters after two fairly tough years that we've had to increase our debt levels. We felt for 2019, it was prudent to suspend the dividend.

Got it. Okay. So I follow you here. Okay. And then looking at your time charters, you charted-in an Aframax, you charted-out a Suezmax. Can you talk a bit more about kind of that six months time charter? Is that for storage or is that for kind of multi-month operations? And then how do you see your fleet kind of going forward, looking at 2020 balancing spot cargoes with time charters to kind of extend you through maybe the upswing here in the next 18 to 24 months?

Yes. It's a good question, because it does look odd that we are out-chartering, in-chartering at the same time, but really that's how we balance our portfolio as we look at the forward market and where we think opportunity lies. So on the Suezmax, that decision was really made in the early part of the year when rates were still very firm. And on a seasonal basis, we were anticipating that Q2 would be weaker than Q1 as it is historically. So we took the opportunity to time charter the ship out at a healthy number and lock in that fixed income. And that ship will probably roll off towards the summer here, which we felt was good timing to start then exposing that vessel to an increasing spot market. The longer-term charter that we took on the Aframax, which doesn't deliver until later in the summer, that was, again, an opportunity to take piece of business that we looked at, based on our forward view of the market in the latter half of 2019 and 2020, possibly 2021. So we felt that the - our projections for rates over that period allowed us to increase our exposure at a level that will give us a decent margin. But it's something that we look at in terms of our trading portfolio and how much exposure we have to a spot market or to short-term volatility and we make those decisions accordingly. Going forward, I think what you'll see is, we started to roll off our fixed income charters as we've moved through 2019. And that is a deliberate move so that we can maximize our exposure to the spot market as we move into, again, the second half of this year and all of next year.

Got it. It makes sense. I have hop up and turn over. Thanks for the time.

Thanks, Randy.

Our next question comes from Jon Chappell, Evercore.

Thanks. Good morning, guys.

Good morning.

Kevin, on the charter-in strategy, I'm assuming given the focusing on deleveraging that vessel acquisition is probably pretty low down on your hierarchy of things to do with cash. So there's a lot of optimism in the market. What's the actual availability of charter-ins that are at rates that you still think are attractive enough to add leverage to the cycle that way?

Good question, Jon. Everybody is looking at the same tea leaves. And there – as you said, there is a fair bit of optimism across the industry in terms of where the fundamentals are pointing to. So if I take a comparison between where we are today and where we were in sort of late 2013 early 2014 , I think there is more optimism now than there was then. And as such, owners rate ideas are firmer than what we saw in 2014. But there is still owners and lenders out there with assets in the market that do prefer fixed-income coverage. And on that basis, given our relationships, our penetration in the market, our pool partners, we've got different avenues that we tend to source out the odd opportunity that may be the general market doesn't get to see. But I think the rates are obviously higher than what we saw five years ago at this point in the cycle. But I think there's still some value there to be captured. But it's – we have to be very picky about where the ship is, what their consumptions are, whether we can – for example, on Aframax, whether we can flip that vessel into our full-service lighterage program, all different aspects of the decision-making. So it's not something that we decide to go out and take five ships and then go just make five phone calls and we're done. We're having to be very selective about the assets we get at the rates that we think will be profitable.

Makes sense. And then taking maybe a different tack here. If I look at your Slide 7, tank utilization, I know it's kind of imperfect, you're eyeballing it. But strongest since 2008, it's quite a robust market, asset values should follow along, maybe not to the same magnitude, but directionally. So if I look at your fleet about 1/4 of it will be 15 years old or older by next year, do you foresee a situation where you maybe start monetizing some of the older assets as a way to further accelerate the deleveraging of the balance sheet, while at the same time, unfortunately giving up maybe a little bit of leverage to the cycle?

Yes. I think, obviously, it's prudent management, the company would dictate that we take a look at that. I think it's early days yet I think the asset market has a bit of a runway to go here as well as the spot market. So I think we should not rush into those decisions. It is and has been raised with the Board in terms of how we look at the market. And I think you will probably see us, as the market strengthens, start to use opportunities, where we see value to add to the deleveraging of the balance sheet. Having said that, just because a ship is 15 years old, doesn't mean that we can't generate strong earnings with it. So we have to balance that with how much leverage we're taking out. So it's something taking out. So it's something I don't think you'll see us do on block, but I think we'll look at opportunities as and when they arise and execute when we think there's value to be generated.

Okay. Final one, and this may be shorter or it may be a bit longer. But noticed this commentary about reimbursable staff costs related to an LNG terminal operations contract starting in mid-1Q 2019. Can you just explain what that means? And how meaningful that potential is?

Sure, Jon. So for Q1, that amount is about $1.5 million and that's simply a contract we have to manage in LNG terminal, where we hire the staff and it's a flow-through cost to the entity that we are providing those services to. So it comes through both revenue and OpEx in the same amount.

Okay. That’s great. All right, Thanks, Stewart. Thanks, Kevin.

Thanks, Jon.

Thanks, Jon

Just wanted to follow up on your sale leasebacks. Have you thought about perhaps just selling part of the fleet to reduce the leverage and shrinking the fleet? Or do you find synergies in the scale that are notable enough to keep the leverage that you need to keep working around?

I think our decision-making, when we did the sales leasebacks, was based not only just on trying to bolster our liquidity position and strengthen our balance sheet as the market was soft, but it was also with a view to where the market was going to go. And selling assets at the bottom of the market is not something that any tanker owner wants to do. So the option to do an outright sale wasn't very attractive, whereas the sale leasebacks building in the purchase options at extremely low levels allowed us the opportunity to get back into a position where we could extract more value out of that asset at some point in the future, while building up our liquidity when we needed it through the downside of the market. So given the two comparables, we found much better value in the sale option – sale leaseback option.

All right. That's helpful. And then just – I want to talk about the rates, you're rate commentary about kind of starting to see softness as you moved into the second quarter, but you expect to bounce back. Just historically, when you get tensions like we recently had with U.S. and Iran kind of building up and moving warships around. Don't you typically see rates tightening fairly quickly? Or maybe you can give us a little history on kind of as tensions increased, what you've seen in terms of kind of rate movement?

Yes. Whenever you have political strife, it tends to have an impact of varying degrees on a market. And I don't think you can compare individual past incidents with current incidents. Every time they occur, they occur for different reasons and with different impacts. The recent sabotage efforts that we saw in – off the coast of Fujairah, they obviously heightened tensions. And the international war group on the insurance side has now included those areas as war-risk areas. But in terms of the safety of traffic through the region, the reports from the security services and from regional governments appear to be it's not a tension that is rising or that we would anticipate immediate escalation of the conflict. So I think the impact that we saw on rates was muted because it was dealt with somewhat quietly and there was no further escalation over the coming week. But certainly, that doesn't say the next time it would happen, the impact wouldn't be stronger and the effect on the market wouldn't be greater. Every time it happens, it's different.

Yes. No. That's helpful insight. Just usually something we've seen kind of drive, I guess depends on the length and scale of the tensions. When you look at the spot versus fixed rates, so you've got more than half of your days fixed for the second quarter. At what point– how do you think about that breakdown between near-term spot and may be building in longer-term rates? Is there – are you looking for certain levels of Suezmax, Aframax pricing before you start looking maybe to lock in for, even if it's one-year charters-out, let's say, out of the spot market? Or do want to keep all of that in the spot market until you get better multiyear rates?

I think our view of the forward market, we wouldn't want to be locking in fixed-rate income at the levels that we're seeing in the time charter market today. We think that will be giving away too much value, but certainly, as the market improves, and as customers look to secure tonnage for longer period at more attractive numbers, we'll certainly – that will be part of our portfolio decision-making. But I think to guide you today, I don't think you'll see us put ships out for 18 months, two years, three years. I think it's too early.

Great. Thank you.

Thank you.

At this time, I would like to turn the call back over to Mr. Kevin Mackay. Please go ahead, sir.

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

Thank you, ladies and gentlemen, this concludes today's teleconference. You may now disconnect.