David Drummond – Investor Relations
Bjorn Moller - President Chief Executive Officer and Director
Vincent Lok – Executive Vice President and Chief Financial Officer
Peter Evensen - Executive Vice President and Chief Strategy Officer
Jonathan Chappell - J.P. Morgan
Ken Hoexter – Merrill Lynch
Daniel Burke - Johnson Rice
Teekay Tankers Ltd. (TNK) Q1 2008 Earnings Call May 15, 2008 1:00 PM ET
Ladies and gentlemen thank you for standing by. Welcome to Teekay Tankers first quarter 2008 earnings release conference call. During the call all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder this call is being recorded. Now for opening remarks and introduction I would like to turn the call over to Mr. Bjorn Moller, TeeKay Tankers President and Chief Executive Officer. Please go ahead sir.
Before, Mr. Bjorn Moller begin I would like to direct all participants to our website at www.teekaytankers.com where you will find a copy of the first quarter 2008 earnings presentation. Mr. Moller will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual result may differ materially from those 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 our earnings release and the earnings release presentation available on our website. I will now turn it over to Mr. Moller to begin.
Thank you Dave and good morning ladies and gentlemen; I am very pleased to report you the results of our first full quarter as a publicly traded company. With me today from Teekay Tankers is Mr. Vince Lok, Chief Financial Officer and Mr. Peter Evensen our Executive VP.
Turning to the presentation and to slide three and reviewing the first quarter highlights, we are pleased to report that the company earned $14 million or $0.56 per share in net income. We also generated $17.6 million of cash available for distribution for the three month period ended March 31, 2008.
As a result, we declared a cash dividend of $0.70 per share for the quarter. The cash distribution is payable on May 30 to all stock holders on record on May 23. On April 7, 2008 we acquired two double Suezmax-class oil tankers, the 2002 built Ganges Spirit and the 2003 build Narmada Spirit from Teekay Corporation for a total cost of $186.9 million.
The company financed the acquisition assuming existing debt related to the vessels and utilizing the company’s un-drawn revolving credit facility for the remainder of the purchase price. The Ganges Spirit will be employed on its pre existing time charter contract that expires in May 2012 and the Narmada Spirit is currently employed in the spot market trading.
Turning next to slide four, our current fleet mix demonstrates the tactical management of our fleet. Out recent acquisition of two Suezmaxs maintenance our balance of stock market exposure and fixed rate coverage. However the Ganges Spirit, although employed on a time charter has a profit share component which allows Teekay Tankers to benefit from high Suezmax spot tanker rates.
The 50/50 profit share on this vessel kicks in at Suezmax rates earned by Teekay's Gemini Pool above $33,500 a day, but it’s only recognized on an annual basis so the up side will not be reflected until the dividend in respect of the fourth quarter each year through 2012.
I would like to spend a little time this morning discussing the spot tanker market which is predominately strong at the moment. In fact based on rates so far this quarter, this is shaping up to be the strongest Q2 tanker market on record. We have booked 65% of our Aframax days at a TCE of $38,000 a day and we have booked 60% of our Suezmax spot days at an average TCE of $62,000 a day. Current market rates for both segments are well above these levels.
When we look at what's driving tanker rates it's comforting to realize that the market appears less driven by short-term events and more by a solid fundamentals and on the following slides I will review the three reasons we see for the current strong market. If any participants on this call who attended the Teekay Corporation call a little bit earlier today, you will find some of these slides to be familiar, but I have some very important points, so it's worth us making these points on this call as well.
So, turning to slide five; reason number one for the strong tanker market is strong tanker demand driven by both higher oil volumes and growing average transportation distances; while oil demand growth is flat, to slightly negative in the US and Europe demand is powering ahead in non-OECD. China and developing Asia currently accounts for 70% of global oil demand growth. In Q1 China’s oil imports were up by 15% year-on-year.
Newly published statistics by China highlights the fact the full 35% of it's imports are now being sourced from the Atlantic basin, which is three times the volumes of five years ago. This highlights the fact that in broad terms the marginal well of oil today is being produced in the Atlantic basin and it is being consumed in the Pacific basin. There is a related trend of new or growing long haul trade roots such as Venezuela, to China and India, Brazil to California and Angola to China and so on. In other words, it takes more tankers to move the same amount of oil today compared to what it used to.
Reason number two is on slide six, is that the required additional tankers to carry this oil may not actually become available due to limited supply growth in 2008. In Q1, the world tanker fleet grew by only 0.06% compared to the end of 2007. Deliveries were almost entirely offset by ships being converted for offshore of dry bulk use, as well as scrapping which actively reemerge due to record high prices for scrap steel.
Many observers have predicted net fleet growth this year based on the published orderbook. The table on this slide takes a closer look at 2008 fleet numbers. The number of new building deliveries projected by Clarkson as shown in the column marked 2008 deliveries as per CRS. Now based on our first hand experience of a six months delay on our own current new building projects in China from what is a relatively well established shipyard we have adjusted, expected 2008 deliveries in the -- from the Clarkson numbers in the next column on the basis that half of the scheduled 2008 Chinese new buildings would be delayed by six months and so as an example of the impact of that if you look at the table Suezmax deliveries in 2008 are predicted by Clarkson should be 21 ships and on our revised modeling that would be 17 ships due to delays in China.
The deletion figures of ships leaving the fleet sold for conversion of scrap column includes ships which have already left the fleet this year plus ships mandated out of the fleet this year by the IMO rule plus tankers sold last year for conversion, but which have not yet been converted but we expect will be converted this year plus 50% of ships reported for conversion year-to-date in 2008.
So, we have assumed no further conversion sales nor any voluntary scraping in 2008, which we think is a very conservative assumption. Based on these and our opinion conservative or realistic assumptions overall Aframax, Suezmax and VLCC fleet growth could be as little as 1% this year as shown in the column on the right hand side.
The third reason we are experiencing a strong tanker market; if you turn to page seven is what we have termed operational constrains; basically a list of factors which in aggregate meaningfully reduced the effective utilization of the world fleet. Single-hull discrimination continues to grow, Korea which has been a leading use of single hull tonnage have set aggressive reduction targets for single-hull use. 20% of the world tanker fleet is dealing a net tighten around it.
A growing a number of ship base are also being lost due to a variety of infrastructure bottlenecks such as ships waiting to unload due to the lack of shore tank capacity in some places. Well ships serving a floating storage as we are currently seeing in Iran where 1.5% of the world tanker fleet is tied up temporarily in storage or in cases where ships are being used as shipping storage by all traders for tactical reasons.
We’re also experiencing stretch repair yards lengthening the average dry-docking stay for ships. As always there are number of temporary factors influencing the fleet and finally and this is probably a factor that’s overlooked by many observers is the issue of higher bunker prices. The optimal economical speed of a ship is the function of the price of fuel and the prevailing trade market.
More than one year ago when bunker prices were well below today’s levels, container shipping lines began slow steaming their ships due to pressures on operating margins. The result was a significant reduction in their fleet capacity. Based on today’s bunker prices of over $600 per ton, a modern Suezmax tanker needs to generate a TCE of more than $50,000 a day to justify maintaining full speed of 15 knots. Otherwise, it is more economical to reduce speeds to 14 knots.
However doing so, would mean taking 6% more days to complete a given voyage. So this equation represents a major self regulating factor in tanker supply that should put a flow on the spot rates at a higher TCE level and its interesting to note than in 2004 which was the previous peak year for taker rates, bunker prices were in fact less than one-third of today’s levels and therefore did not provide anywhere near the same underpinning to market rates as is the case now.
The slide eight will show the close correlation between global fleet utilization and tanker spot rates. It is generally accepted that for various reasons of inefficiency in the world fleet 90% represents full utilization in the world fleet and once you get a bulk of that level of utilization, spot rates tend to spike dramatically. According to Platou, world tanker fleet utilization is now back above 90% explaining the market strength we are currently enjoying. While it is too early to rule out a degree of seasonal weakness later this summer, fundamentals point to a very tight tanker market overall for 2008.
Turning next to slide nine, I would like to reiterate the significant growth potential of Teekay tankers, which will allow us to achieve our business objective of increasing dividends per share. Firstly, Teekay is obligated to offer us two additional Suezmaxs no later than July 2009; this is in addition to the two Suezmaxs we acquired in April 2008.
Second, Teekay has over 30 tankers in its fleet which would be suitable for us to acquire and thirdly, there are over 1500 crude oil tankers and over 450 product tankers in the world with tanker ownership being very highly fragmented in this fleet, this represents a great opportunity for Teekay to consolidate the market.
In closing, we are pleased with Teekay tankers, first full quarter results and we look forward to continuing our growth with the objective of maximizing dividends per share. We are now happy to take your questions. Thank you.
(Operator Instructions) The first question comes from John Chappell, from J.P. Morgan. Please go ahead.
Jonathan Chappell - J.P. Morgan
Thanks, good morning guys. On the growth opportunities, we know what Teekay has to drop down, but I think the third party drop downs offer a lot more potential, can you talk about how the return dynamics have changed just in the last three months, since we spoke last, we have seen some players who have been out of the market for several years start to return now; do the rates now justify kind of current asset prices in your view?
Yes, I think they do and of course you have to have the currency to be able to acquire assets and I think that we would be -- cost of development in Teekay Tanker’s share price; I think we have a good currency. So, the whole theory behind the Teekay Tanker’s growth strategy is to be able to use its superior currency to consolidate a very fragmented market and so there is no question that that strategy is setup for success in light of the various dynamics we see now.
Jonathan Chappell - J.P. Morgan
When we look at third parties, would you envision trying to remain in the Aframax and Suezmax mid size tanker fleet, so you can benefit from the pools that you already have established?
That would be the primary growth path as we see it right now. I mean there is clearly opportunity if attractive deals came along elsewhere but I think that will be the main for us, because there is economy of scale and Teekay has some strong customer relationships that can be used and so I would say that that is the primary growth path and that’s also where I think we have a competitive advantage to our fleet utilization and our ability to extract additional cash flow per share for that.
Jonathan Chappell - J.P. Morgan
I know the Kanata expiring very soon in the foster and a couple of more months probably for the next call. Are you planed to re-charter both of these on contracts, you try to balance them out, maybe one and one and has your ideas kind of changed given the unseasonable strength of the spot markets.
Yes I think, we kind of -- I guess we are going to be actively and tactically managing the fleet. When we took one Suezmax in the spot and one with time charter that was I guess replenishing a proportion a little bit more in the time charter side and there was sort of an anticipation that we would have some ships running off, so I suspect we will either not renew, either of those ships or at the outside maybe one of those ships depending on where rates go. We have also said of course that if there was a significant pick up in rates and we could layoff some tonnage, then we would look at that, but they would have to be at rates that are quite a bit higher than were they are expiring in my view in light of the strong market.
Jonathan Chappell - J.P. Morgan
Okay and then finally just, is there any scheduled off-hire days for the fleet for the remainder of this year?
We do have one vessel, that’s dry-docking in the second quarter and we have one Suezmaxes dry-docking in the fourth quarter of 2008.
(Operator Instructions) The next question comes from Ken Hoexter from Merrill Lynch; please go ahead.
Seth Larry – Merrill Lynch
Hi, this [Seth Larry] in for Ken, who is traveling. I was wondering if you could dig in a little further on the revenues for 2Q. I know you mention before for both vessels it would be approximately 60% booked or so. I was wondering how long do you expect until you’ve got 100% booked and can you quantify providing further color on how much higher the rates are going to be for that remaining percentage that's un-booked?
I think it’s -- I mean I think it we can all look at Clarkson's numbers which you can see tanker rates for Suezmax's for Clarkson at 100,000 a day and at the moment and I think depending which route you look at, Aframax is arranging from 45,000 to 75,000, but that’s using Clarkson we’ve -- in order to be consistent we stick to the guidance we’ve given. I guess I can't say that, our first -- our Q2 Aframax number is influenced by the fact that some ships are trading in the east and some in the west and there was a bit of a slower start and slower ramp up in tanker rates in the East, in April, but that has since caught up and now tanker rates in the East are actually quite strong. So, I guess typically you fix -- the booking for Suezmax is a little further ahead than from Aframax, so you would typically be fixed three to four weeks ahead for Suezmax tankers and two to three weeks ahead for Aframax tankers. This quarter it's actually a little bit reversed and that we have further coverage on the Aframax but it's pretty close.
Your final question comes from Daniel Burke from Johnson Rice. Please go ahead.
Daniel Burke – Johnson Rice
Just one question on the leverage you are comfortable with, the Teekay tankers in light of the Suezmax acquisitions; I was curious what you felt was the most appropriate leverage range particularly in light of your comments that you maybe comfortable shifting; I guess the Kanata and the Foster towards the spot market?
Dan we started out with the IPO at a very conservative leverage level of 25% debt to turn market value of assets. With the acquisition of the two Suezmaxs, I think one of things we are benefiting from is the low interest rates. The $119 million that we paid for those two ships, the average interest rate right now and those on a floating basis is about 3.5% all in. So, right now our debt deferred market value is sort of in the mid 40% range. I think long-term we would like to lower that to strengthen the balance sheet further, but right now we are benefiting from the low interest rate environment.
Daniel Burke - Johnson Rice
Sure, thanks and then I guess one ticky tack follow-up, just the G&A line is that a good run rate; it’s a little lower than we thought we would see?
Yes, I think on an average you should look at about $2000 per ship per day.
Mr. Moller. There are no further questions at this time. Please continue.
Okay. Well, thanks very much for attending today. This is our first full quarter and we are very excited about the results for the quarter and we are excited about the strong tanker market. So, we appreciate your interest and have the nice day.
Ladies and gentlemen, this concludes the conference call for today. You many now disconnect your lines and have a great day.