Teekay Tankers Ltd  (NYSE:TNK)
Q2 2019 Earnings Call
Aug. 01, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to Teekay Tankers Limited Second Quarter 2019 Earnings Results Conference Call. [Operator Instructions]

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.

Lee Edwards -- Investor Relations

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.

Kevin Mackay -- Chief Executive Officer

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 at 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 US 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 third quarter thus far have been affected by seasonal summer weakness. However, supply and demand fundamentals are signaling toward 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 in 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 will indicate a tightening of the supply/demand balance. This is an encouraging sign as we head toward the seasonally stronger fourth quarter.

Turning to Slide 5, we look at the growth in US crude oil exports and how this has led to increased lightering demand and our improved Aframax earnings. US 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 US 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 VLCC's, which require reverse lighterings via Aframaxes due to draft constraints in US 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.

US crude oil exports are projected to continue to rise over the next 18 months as new pipeline capacity linking the Permian Basin to the US Gulf Coast is completed. As shown by the chart on the slide, US 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 mid-sized 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% 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% spot revenue days booked, third quarter-to-date bookings have averaged approximately $12,200 per day.

However, turning to Slide 7, market fundamentals point toward 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. It 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 US 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 US sanctions on Venezuela continues to have a negative impact on mid-sized tanker market in the US Gulf carriage market.

Turning to fleet supply, the next two years look 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 two year runway where fleet growth is expected to be only around 2% versus the historical average of around 5%.

Fleet growth could be further dampened 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 through 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 8 AM Eastern Time, with presentations between 8:30 AM and 11:30 AM 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're now available to take questions.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from John Chappell of Evercore.

John Chappell -- Evercore -- Analyst

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. 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 two, 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.

Kevin Mackay -- Chief Executive Officer

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, obviously, due to the OPEC customer seeing the import volumes reduce slightly and our balance between the two has driven more toward a higher percentage being export. With the pipeline capacity coming on, obviously, that portion of the business on the reverse lightering is expected to grow. What we're looking at is, as we balance our overall Aframax portfolio, at the moment we're probably weighted 50/50 between Eastern markets and Western markets. But as we see more volume coming out of the US Gulf and the premium that we get out of the lighterage business, you'll probably see a start to positioning more ships toward the Atlantic and specifically the US Gulf to try and support that market.

We also have the added lever to pull that 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 US Gulf.

John Chappell -- Evercore -- Analyst

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

Kevin Mackay -- Chief Executive Officer

Well, I think the -- like any pipeline project, they will come out of different times and some may get delayed a bit, it'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 US Gulf River system is fairly congested and that may lead to further logistical delays, which eats into tanker supply, which is good for us.

John Chappell -- Evercore -- Analyst

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

Kevin Mackay -- Chief Executive Officer

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.

John Chappell -- Evercore -- Analyst

Okay. Final one maybe pull Christian in, if I may. Reading the press release, there were two kind of supply/ demand things set out to me. One was the big ramp in the IEA, which we've kind of been talking about that as well and how do you think about the refinery runs increased 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 the first half delivery schedule being the greatest, I think, since 2011 for a six-month period. So how do you think about the timing of absorbing that into kind of the demand environment that we're looking at?

Christian Waldegrave -- Director, Research

Hi, John. Taking your first one on the refinery run. I think what we saw in the first half of the year and especially Q2, and I think it spills over a little bit into the early steady 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 rate that we're now seeing in the early part of Q3. But I think there are some encouraging signs actually in the second half of the year, refining margins in Asia have recovered. Just of the end of July, we've accumulated a two-year high, so we'd 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 actual tanker demand.

So as I said, we -- in the prepared remarks we do feel that the fundamentals of the demand side will improve and we haven't seen that kind of IMO 2020 bunch heavy [Phonetic], which we think will still come in the second half of the year because refineries will have to start going at fairly high utilization levels in order to produce sufficient 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 or two halves, like the first half of the year was definitely very high fee 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. It takes time to absorb that capacity once it comes into the fleet. But the good news looking forward is that for the next two years, the shipyards are booked up for the next two 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's going to be no ships scraps 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 is going to be 2% per year for the next two years. So that again should facilitate a tanker market recovery.

John Chappell -- Evercore -- Analyst

Okay, great. Thanks for the thoughts, Christian. Thanks, Kevin.

Operator

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

Randy Giveans -- Jefferies -- Analyst

Two quick questions from me, you mentioned that debt repayment, obviously, will support the share price. So how do you kind of prioritize this in terms of use of free cash going forward relative to vessel acquisition, through share repurchases? I know dividends are kind of a maybe 2020 story, but in the interim is debt pay down like 100% use of free cash going forward?

Stewart Andrade -- Chief Financial Officer

Hi, Randy. For 2019 debt repayments will be our focus and I think as we repaid some of that incremental debt that we took on and some of our liquidity initiatives over the last two 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 is our dividend capacity at that time. So I think into 2020, we'll start to look at different options aside from debt repayments.

Randy Giveans -- Jefferies -- Analyst

Okay. And then kind of looking at your fleet, you have maybe 10 to 12 vessels or so over 15 years of age. Are you thinking of possibly selling some of those to further accelerate that strategy of de-levering the balance sheet?

Kevin Mackay -- Chief Executive Officer

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 start 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.

Randy Giveans -- Jefferies -- Analyst

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 MGO or VLSFO?

Kevin Mackay -- Chief Executive Officer

That's a good question. We over the last really two years have really been gearing up to face this IMO implementation on January 1. So I think in terms of what kind of fuels we burn, we purchased fuel in 70 different locations around the world last year. So we've really had to approach this with flexibility of mind. So what we're looking to do is stem both 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?

Randy Giveans -- Jefferies -- Analyst

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

Kevin Mackay -- Chief Executive Officer

Yes. It will depend on the class of ship, obviously, with Suezmaxes running on much longer voyages, we're going to have to start to put on the lower sulfur grades earlier, then maybe the Aframaxes that we can push closer toward 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're doing long West Africa or US Gulf to China runs.

Randy Giveans -- Jefferies -- Analyst

Great. All right. Thanks for the color.

Kevin Mackay -- Chief Executive Officer

Okay. Thanks, Randy.

Operator

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

Ken Hoexter -- Bank of America -- Analyst

Great. Good afternoon, Kevin and Christian and Stewart. Just wanted to follow-up, I guess, one real quick one on the time charters-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?

Kevin Mackay -- Chief Executive Officer

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 and not necessarily just default to a release of the vessels 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 come to terms that we think are economically advantageous to us, then, yes, certainly you'll see those ships roll off.

Ken Hoexter -- Bank of America -- Analyst

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 installation 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 third quarter, fourth quarter timing or do you not think it really hits until the demand for new fuel and into the beginning of 2020?

Kevin Mackay -- Chief Executive Officer

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've spoke to have indicated that, they will have the scrubbers on board and ready for January 1. So there's 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 will certainly help the supply/demand balance that we're looking at.

Ken Hoexter -- Bank of America -- Analyst

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

Kevin Mackay -- Chief Executive Officer

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

Ken Hoexter -- Bank of America -- Analyst

Helpful. And then just a 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?

Kevin Mackay -- Chief Executive Officer

I don't think you can really speak to one thing that's going to drive it one way or the other. I think historically in the tanker market, it's always been a combination of events or of headwinds or 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, the utilization rate should pick up as we move through this year and into next year and that should be positive for rates.

Ken Hoexter -- Bank of America -- Analyst

Great. Appreciate the time. Thanks again.

Kevin Mackay -- Chief Executive Officer

Thanks, Ken.

Operator

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

Kevin Mackay -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 28

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minutes

Call participants:

Lee Edwards -- Investor Relations

Kevin Mackay -- Chief Executive Officer

John Chappell -- Evercore -- Analyst

Christian Waldegrave -- Director, Research

Randy Giveans -- Jefferies -- Analyst

Stewart Andrade -- Chief Financial Officer

Ken Hoexter -- Bank of America -- Analyst

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