Teekay Tankers Ltd. (TNK) Q2 2015 Earnings Report, Transcript and Summary

Welcome to Teekay Tankers Ltd’s Second Quarter 2015 Earnings Results 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 introductions, I would like to turn the call over to Mr. Kevin Mackay, Teekay Tankers Ltd’s Chief Executive Officer. Please go ahead, sir.

Before Mr. Mackay begins, I would like to direct all participants to our website at www.teekay.com, where you will find a copy of the second quarter 2015 earnings presentation. Mr. Mackay 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 2015 earnings release and earnings presentation, available on our website. I will now turn the call over to Mr. Mackay to begin.

Thank you, Ryan. Hello, everyone, and thank you very much for joining us today. With me here in Vancouver is Vince Lok, Teekay Tankers’ Chief Financial Officer; and Brian Fortier, Group Controller of Teekay Corporation. During today’s call, I will be taking you through Teekay Tankers’ second quarter of 2015 earnings results presentation, which can be found on our website. Beginning with our recent highlights on slide three of the presentation, Teekay Tankers reported adjusted net income of $0.35 per share in the second quarter, a substantial increase from the second quarter of 2014 adjusted net loss of $0.05 per share. The improved results were primarily due to stronger Suezmax, Aframax, and LR2 spot tanker rates, combined with an increase in the number of spot tanker operating days as a result of five vessels acquired in February and an increase in our in-charter portfolio. We generated free cash flow of $58 million or $0.50 per share during the quarter, up from $9.2 million or $0.11 per share in the second quarter of 2014. While Teekay Tankers’ earned strong free cash flow during the quarter, our results would have been even stronger in the absence of some non-recurring issues related to three vessels which have largely been rectified, with the exception of one in-charter tanker which has not yet delivered due to vetting issues. Yesterday, we announced the acquisition of 12 modern Suezmax tankers at an attractive price of $662 million. I will provide additional details on the strategic rationale and financial benefits of this transaction as well as our view of Suezmax tanker market, later in this presentation. In late July, we also completed an acquisition of a ship-to-ship transfer business, SPT Inc. from Teekay Corporation and I.M. Skaugen for $45.5 million. This transaction establishes TNK as a global player in the ship-to-ship transfer business. Both acquisitions are fully financed and are expected to provide immediate accretion to Teekay Tankers’ earnings and free cash flow per share. In the spot market, driven by strong supply and demand fundamentals, we have continued to benefit from counter-seasonal strength in the third quarter of 2015 to-date. Turning to slide four, I’ll discuss the key benefits of Teekay Tankers’ strategic acquisition of 12 Suezmaxes from Principal Maritime. Foremost, the acquisition of this high quality underwater fleet provides Teekay Tankers’ with increased operating leverage at a time in the tanker market cycle when positive market fundamentals support continued strength in spot tanker rates. As you can see from the chart on the bottom right of the slide, the transaction has increased Teekay Tankers’ operating leverage from $0.52 per share of free cash flow to $0.60 per share of free cash flow for every $5,000 per day increase in Aframax equivalent sport tanker rates. Based on the $662 million on unbooked purchase price, the acquisition is expected to be accretive to Teekay Tankers’ earnings, free cash flow and net asset value per share which we’ll discussed in more detail later in this presentation. The acquisition also provides Teekay Tankers with the benefits of increased sale. The 12 acquired Suezmaxes more than doubles Teekay Tankers’ owned Suezmax fleet and positions TNK among the top three Suezmax owners in the world. This significant increase in scale will allow us to further optimize our fleet efficiencies, enhance our service offering to both existing and new customers across more regions, and expand our presence in the evolving global Suezmax trade-routes. With a larger fleet, we are better positioned to take advantage of the growing demand for Suezmaxes resulting from greater long-haul movements from the Atlantic to Pacific basins as well as the niche intra-regional voyages. Lastly, with the fleet age of 5.5 years, the acquisition of these modern vessels, reduces the average age of Teekay Tankers fleet by 1.2 years. Turning to slide five, I’ll spend a moment to discuss the changing dynamics of Suezmax tanker trade which has and continues to undergo significant transformation. In recent years, the traditional Suezmax benchmark trade lane between West Africa and the U.S. represented by the gray arrow on our map, has decreased substantially as the U.S. requirement for light-sweet crudes declined due to record high domestic crude production, particularly from Shale. Nigerian and Angolan production has however found new markets in Europe and Asia, as buyers in those regions have sought to diversify their oil supply sources and look to take advantage of price and quality differences as well as mitigate potential supply disruptions due to geopolitical instability. As a result, there has been substantial increase in Suezmax cargos moving from Atlantic to Pacific Basins which is positive for ton-mile demand. Loadings from the Caribbean basin held for Asia have also seen a marked increase of over 28% year-to-date in 2015 compared with 2013. With more vessels opening in the East coinciding with the increased exports from the Middle East OPEC countries battling for more market share, Suezmaxes are now taking a largest share of AG volumes moving East Asian destinations. Between 2012 and 2014 Suezmax loadings from the Middle East increased by approximately 23% year-on-year and have increased by further 16% in 2015 year-to-date with majority of these cargos headed to China and other Asian destinations. In addition to evolved trade-routes, we’re increasingly seeing cargos move on Suezmaxes from supply sources in Mexico and Ecuador to Korea as well as from Brazil through to U.S. and Europe. All of these dynamic changes in trade patterns are effective stretching out the Suezmax fleet, increasing miles moved and creating tightness in vessel supply. The increase in vessel utilization coupled with moderate fleet growth which I will touch on in a moment is combining to drive greater volatility and stronger spot rates for Suezmax tankers. Turning to slide six, we’ll look at developments in crude tanker fleet supply. Due to minimal removals from the global tanker fleet in first part of 2015, we’ve lowered our 2015 scrapping forecast to reflect this reality that many owners who have been deferring scrapping in order to take advantage of the current strong spot market. However, even accounting for the delayed scrapping, overall global crude tanker and Suezmax fleet growth is still expected to remain low in 2015 at only 1%. For 2016, we forecast fleet growth increase to approximately 4% across the crude tanker fleet and the Suezmax fleet growth expected to grow by 3.6%. Although growth is expected to increase in 2016, levels are still well below the 5% average annual fleet growth experienced over the last decade. While the outlook for 2017 is less certain, since there is still room for more orders, we anticipate 2017 fleet growth in the crude tanker segments to remain moderate. In addition owners that have chosen to defer scrapping of older vessels in 2015, have more difficulty holding off on scrapping decisions in 2016 and 2017 with critical docking and significant CapEx decisions needed to drive things such as ballast water treatment systems which could bring net fleet growth in these years even further below the five year average. Turning to slide seven, I will discuss our recent acquisition of the ship-to-ship transfer business. Late July, Teekay Tankers acquired SPT Inc. which provides a full suite ship-to-ship transfer services in the oil, gas and dry bulk industries, from Teekay Corporation and I.M. Skaugen. In addition to transfer services, the business also provides consultancy and terminal management for a wide range of customers. This acquisition which establishes Teekay Tankers as a global player in ship-to-ship transfer business is expected to increase Teekay Tankers’ fee-based revenue and overall fleet utilization. This acquisition also creates an opportunity for Teekay Tankers to develop and enhance service offerings for our customers. It creates a level of customer engagement, not achievable in the standard spot chartering environment and provides us with a vehicle to develop new customers, not typical to our standard Aframax voyage business, which should help to bolster our overall customer development efforts. Our involvement in ship-to-ship operations in U.S. Gulf will also enhance our ability to optimize scheduling of tonnage thereby reducing idle time and increasing utilization. In addition to benefiting our core tanker business, we believe that there is potential to gain significant market share in the global ship-to-ship transfer market. And we initially expect to generate between $10 million to $12 million of cash flow from vessel operations, or CFVO, annually. Turning to slide eight, I will walk through to financing and expected accretion of our two recent acquisitions. Financing of these acquisitions has already been arranged, the total aggregate price of approximately $708 million financed through a combination of the new need debt facility of approximately $400 million arranged with four of our key lenders and expected to be completed by the end of August 2015. The issuance of approximately $223 million of new common shares including $75.5 million to Teekay Corporation, $50 million to Principal Maritime and $37.3 million to our continuous offering program completed during Q2 and the remaining amount funded from Teekay Tankers existing liquidity which at June 30th 2015 is approximately $230 million. As shown in the table at the bottom of the slide, these acquisitions are significantly accretive to Teekay Tankers’ key financial metrics, increasing pro forma adjusted net income per share and free cash flow per share by 22%. Based on our pre-arranged financing, on a net debt to book capitalization basis, leverage is expected to remain at similar levels before and after the transaction while the increased operating leverage what we believe will be a continuing strong tanker market is expected to generate significant cash flows that can be used to further reduce our financial leverage. Overall, we believe these transactions will increase Teekay Tankers’ dividend capacity and create long-term value for shareholders. Turning to slide nine, I will discuss the counter-seasonal strength in second quarter and the third quarter to-date. Spot rates in the second quarter were the highest second quarter rates in seven years with the strength experienced in the first quarter of this year continuing into the second quarter due to ongoing positive tanker market fundamentals, including low crude growth, growing global oil demand and an increase in long-haul tanker movements. Low global oil prices, record high OPEC output, further oil stockpiling and delays in Singapore and U.S Gulf have recently provided further support to the crude tanker market with rates at the beginning of the third quarter remaining counter-seasonably strong. Looking into respective bar charts on this slide for the Suezmax and Aframax segments. Based on approximately 39% and 46% of spot revenue days booked, Teekay Tankers’ third quarter to-date, Suezmax and Aframax bookings have averaged approximately $40,500 and $39,400 per day respectively. While for the LR2 segment with approximately 68% spot revenue days booked, we have seen rates continue their upward momentum, averaging approximately $34,700 per day. As illustrated in the appendix of the presentation showing TNK’s dry-docking schedule for 2016. The second half of 2015 will have 16 dry-dockings in total. The high number of dockings is being done partially in advanced of ballast water treatment modification requirements anticipated to come into effect in 2016 and partially to improve the fuel efficiency of some of the newly acquired vessels. It’s expected that 10 vessels will be docked in the third quarter of 2015 with plans to dock remaining six vessels as early in the fourth quarter as possible. Given the schedule we expect, these vessels to be fully available for trading from winter spot market. And TNK does not anticipate any dockings in 2016 as a result of this. Turning to slide 10, the underlying fundamentals which have driven strong demand for tankers, namely high crude oil supply and raising all demand are expected to remain strong during the second half of 2015. First, looking at all demand in the chart of the top left of the slide. The IEA has continued to adjust its annual oil demand growth forecast upwards over the course of the year. Starting with initial slightly bearish annual demand growth forecast of approximately 900,000 barrels per day in January, the IEA has gradually increased its average oil demand per day forecast for the year to 1.2 million barrels per day in July, as low oil prices have continued to prompt increased end user demand. Tanker demand in the second half of 2015 and 2016 is expected to be supported by ongoing stockpiling programs in China as buyers take advantage of persistent low oil prices. Looking at the graph at the top right of the slide, the supply of oil is expected to outpace demand by approximately 2 million barrels a day in 2015 and approximately 800,000 per barrels per day in 2016. As a result, the substantial imbalance between supply and demand is expected to keep oil prices at a current low levels through 2016. We should continue to encourage stockpiling and high refining utilization. In addition, we expect instances of port delays due to tank space limitations in Europe, Singapore and the U.S Gulf will continue to tie up vessels throughout the remainder of this year and well into next. Overall, we expect the strength of the current tanker market will persist through the remainder of 2015 and into 2016 as the positive fundamentals of low fleet growth, low oil prices and increased demand underpin the crude tanker market. Wrapping up on slide 11, I would like to summarize how Teekay Tankers continues to use a variety of levers to execute on its strategy and deliver a significant shareholder value. Over the past year, we have actively pursued in-charter tonnage while also reducing our out-charter commitments as vessel roll off through existing time charter obligations. During this time, we have increased our fleet of in-charter tankers by 12 ships which has contributed to a substantial increase in our spot exposure to 85% of our combined owned and chartered-in fleet. We have also continued to utilize Teekay Tankers’ strong operating platform to pursue accretive consolidation and investment opportunities. In the past year, we have secured accretive acquisitions of 17 high quality on the water midsized tankers, including the 12 Suezmax tankers we agreed to acquire this week, which have also contributed to our increased operating leverage. In addition to our tanker earnings, we also saw opportunities to enhance our revenue base from fee based businesses. In addition to our July acquisition of SPT which will add a full suite of ship-to-ship service revenues to our business, in the past year we acquired a 50% interest in Teekay Corporation’s commercial and technical management operations which provide a strong platform for which to generate fee revenues to our core tanker chartering and technical management business. Finally, we have further enhanced our financial strength by applying a portion of our strong free cash flow generation to reduce Teekay Tankers’ net debt to book capitalization from 72% at the beginning of 2014 to 56% at June 30, 2015, giving pro forma effect to this past week’s acquisitions. We believe our ability to utilize a variety of levers to execute on our strategy positions Teekay Tankers well for the creation of shareholder value over the long-term. Combined with strong tanker demand and supply fundamentals, our recent accretive acquisitions have enhanced our ability to generate strong free cash flow per share which is a key contributor to Teekay Tankers’ ongoing financial strength. With that, operator, we’re now available to take questions.

[Operator Instructions]. The first question comes from Jon Chappell from Evercore ISI. Please go ahead.

Kevin, I have to start with the obvious couple of comments both in the presentation and the press release about the enhanced dividend paying capacity from this transaction announced this week, $0.96 free cash flow in the first two quarters of the year and $0.06 in dividend. So obviously you can’t speak to exactly where the policy is going to go, but maybe you can just talk about the thought process of floating dividend kind of returning to what TNK was originally constructed as to a fixed dividend and maybe even more importantly maybe the timing around the change in the policy now with this acquisition as we move in the year?

I think first and foremost I would like to say that the idea of the strategic move to take on these 12 additional units was really at the back of our mind, adding shareholder value and being able to generate increased cash flows, so that we can stick to our plan of delevering the balance sheet and creating financial strength with the view to then looking at where our dividend policy would go. Vince, do you want to add to that?

Maybe I can just elaborate a little bit more on the dividend question. As we mentioned last quarter, we believe it is prudent to continue to delever our balance sheet further, before considering increasing our dividend. But as Kevin mentioned, given the significant amount of equity that we used to finance these recent acquisitions as well as the significant free cash flow generation, even before the Principal Suezmax fleet hits our balance sheet. You can see that these acquisitions will not result in a material change to our financial leverage. So really there has been no change, no real change to original timeline on the dividend. And I should add that it was important to our Board that these acquisitions would not impair our ability to increase our dividend going forward. And in fact since these transactions are significantly accretive to our free cash flow per share, we’ve actually enhanced our capacity to increase the dividend going forward. So, given the rapid delevering in our balance sheet in terms of your timing question, I don’t think we can be that specific. But I can say that we plan to talk to our Board later this year on our dividend policy. But in the meantime, the excess free cash flow that’s retained in the company is increasing our net asset value of the company and at the same time strengthening our balance sheet. And if you look at our $0.50 of Q2 free cash flow versus our $0.03 dividend, you can see we have the capacity to do both, to increase the dividend and delever the balance sheet at the same time.

Couple of other questions on the SPT transaction, since I have you. How do we even go about modeling, something like that? You gave us the EBITDA contribution but certainly visibility on the top line versus the cost associated with it, is it a seasonal business, how would you get started on remodeling that business out?

Yes. I think we can give more details once the acquisition has been implemented. As we guided, we expect the annual EBITDA for SPT to be about $10 million to $12 million. And that cash flow is fairly stable because the lightering support business is a fairly stable business. On top of that, we will be using a portion of our existing fleet to trade in the full service lightering business. So that will enhance the utilization of our existing fleet on top of the $10 million to $12 million of EBITDA that I mentioned. In terms of top-line, I think it’s difficult to estimate that at this point in time. I would say that the top-line revenue, roughly speaking, would be about $65 million to $70 million and then the EBITDA margin of $10 million to $12 million. So therefore, our operating cost would increase and then there is probably some depreciation related to some of the support vessels and tenders and things like that. So that’s all been built into the pro forma figures that you see on slide eight.

Just one or two just quick ones. The issues that you talked about, Kevin, the non-recurring issues with the three vessels, two sounds have been rectified. Can you just give a little bit more information on what happened there? And I guess even more importantly directed, was the remedy completed by June 30, was there some carry through into the third quarter on these issues?

Yes. Of the three ships, obviously the one ship that I pointed out, has not delivered one of the in-charter ships. They have not delivered because of vetting issues. And really the other two ships are very much along the same lines of vetting challenges. One of the vessels we have purchased earlier in the year in the transition from technical management over to TNK, the vessel had some ideal time and because of her positioning, it took us two or three voyages before we can get the requisite number of vetting inspectors on board to clear oil majors [ph] to give us unrestricted trading on that ship. So that’s all been completed. And that ship is fully integrated into the system and is operating as for the rest of the fleet. The other in-charter vessel that we had in the fleet had a minor incident that required oil companies to put it on technical hold. But as she came off technical hold, different oil majors approve it at different speed. So, there was restricted trading on her that we incurred. But that has now been removed and she has been clear to trade as for the rest of the fleet we don’t anticipate an ongoing issue.

And the one that still has -- that hasn’t been delivered yet. Is that reflected in this appendix, fleet employment profile or is that ship not there or how do we kind of match those two other?

It’s still there, it’s still on the appendix because at the end of the day, Jon, the ship will deliver to us. We still have the charter -- the owner still has the charter obligation into fleet. And once they get some technical answers to oil companies and get the vettings approved, we expect her to be delivered to us and will take the charter through the full balance of the period that they have committed to.

Superfast, last thing, the last appendix of the dry-docking, you mentioned ‘16 versus ‘18 in here. I am just wondering one of the footnote that said that there is a couple of Principal ships that have to go in the dry-docking. Does this incorporate Principal dry-docking as well in this appendix?

It does. There was a couple of ships that required docking in 2015. And we’re going to put some fuel efficiency modifications on those. The appendix that you’ve got should have been updated by now; it should reflect ‘16 instead of ‘18.

And the next question is from Michael Webber from Wells Fargo. Please go ahead.

Kevin, I just wanted to dive in really quickly on the dividends. Jon had most of it. But just to make sure we’re clear around I guess the thought process, would it be fair to assume to likely see you with your sister companies in TOO and TGP, some sort of cash flow based metric when evaluating the dividend policies once you get through your, whatever pro forma leverage level your comfortable with?

Yes. I think as we mentioned last quarter, as you know in the past, we had a full variable payout dividend in TNK. We mentioned that we wouldn’t return to a full payout dividend policy. But we will well evaluate all the different alternatives in terms of the variable dividend versus a fixed dividend taking into account the nature of this business being more variable versus our MLP business which is much more stable. So, I can’t be very specific I guess on which direction we would go but I think we would evaluate all the alternatives.

Just to circle back on the deal and it seems like if it’s accretive NAV which is increasingly rare within the capital markets right now, just curious considering the strength of the equity currency and that there is a lot of other M&A kind of been [ph] about the market. How you guys think about your capacity right now to look beyond the Princimar fleet and whether or not you think you need to take some time to digest or whether you think you remain relatively active without taking yourself into the corner in terms of actually doing something, what you think your appetite would still be right now for additional tonnage again considering the strength of the currency and that you are actually using it to create value from an NAV perspective?

I think it’s a good question Mike. Having just completed the transaction yesterday, I’ll be honest, I think the team really wants to focus on transaction and…

More than 12 hours to digest it I guess.

…as well as the SPT transaction, which does require some integration into our program. So for the time being, we’re focused on really extracting the value out of these acquisitions and making sure dissimilation into our program is smooth and seamless. It’s critical that we get both entities or both acquisitions integrated and on the ship side to get them fully operational and in the system by the fourth quarter. So at this point in time, I would say to you that’s what our focus really is. We’ll continue to look at what’s in the market and opportunities and do the evaluations as we’re done with this for these few acquisitions. So, I’m not ruling it out but it’s not high on the agenda right now in terms of whether team is paying attention and focus.

One more from me and I’ll turn it over. And given you kind of hinted this in your prepared remarks, and I think you mentioned on slide 10 around low oil prices encouraging stockpiling. We’ve got obviously low crude prices relatively firm inventories, saw sharp jump in gasoline inventories earlier this month and it look like we could be heading into a period where we see refineries either easing up on our owns or moving towards these all maintenance. I’m just curious how realistic do you think slightly larger scale floating storages for the back half of the year? And if we were to start seeing that when -- when do we start hearing about it from -- on a commercial basis, will it be just increased delayed discharge and then start splitting [ph] into firm storage contracts? Just curious as to what your thoughts are around that in the back half of the year.

I think based on what’ve seen in the last forward curve on the oil price, the contango play just isn’t there with tanker rates at the levels they are. I think we’re probably $0.80 a barrel shy of what would make economic sense to store. What we are seeing though and it’s relatively -- it’s across the fleet, the Aframaxes as well as Suezmaxes is shorter term through stockpiling; traders and oil companies taking vessels in the market and holding them for 15 days to 20 days before deciding on delivery destinations and who they’re selling to. So, I think that will continue. I think as the refineries show into a greater period of maintenance, the oil has to be kept somewhere. And I think the short tanks are -- Saldanha Bay is approaching tank tops. It’s probably 20 million barrel shorter of capacity. So, I think there is an opportunity for it to happen. But I think the forward oil price ahs to drop and maybe tanker rates not spike as high as what they need to do to get that contango $0.80 margin to narrow.

The next question is from the Noah Parquette - JP Morgan. Please go ahead.

Just kind of a broader market question, asset values for ships haven’t really moved up along with rates, I mean it’s obvious with the cash flow generation from deal you just did. Can you maybe talk about why that is? And I mean if it’s scarcity of capital or it’s expectations? And finishing up the process, how competitive was the bidding for the fleet that you just bought? Is there any insight there would be helpful.

I think you are right in Noah in stating the asset prices have lagged spot tanker rates. My sense is that is a delayed reaction from people trying to fully assimilate the fundamentals of market are here to stay. We’ve just come out of a extremely long winter doldrums. And I think it’s taking people time to look at what’s driving this market and really get an understanding of the underlying causes of it. So, I think that’s why you’ve may be seen some hesitation in the first quarter. Liquidity definitely picked up in the second quarter; we’re seeing a lot more activity on second hand sales and such like. And I think the competition for this acquisition was fairly competitive. I think there was a few companies out there may not able to swallow the whole fleet but certainly able to take a large chunk of assets. And that was what really gave us the advantage in this acquisition was that TNK had the ability to take on the entire fleet in one go. And our track record of executing on transactions of this scale in the nature and that’s what made us -- gave us the competitive advantage.

And then moving on to the charter market. You are still mostly spot but you still have a couple ships on chartering. We’ve seen more at longer term, two three year charters last couple of months. What are you hearing when you talk to charterer; are you happy with your spot exposure; what’s your kind of target going into next year?

I think customers have actually been the same as ship owners. They’ve sat on the sidelines for most of this year looking at what is driving this market and if it’s sustainable. And I think they’ve come to conclusion that it is here that robust rates are not going away anytime soon. And they’re now starting to look at covering their positions and taking out some of the volatility that are exposed to in spot market. So definitely more inquiry and reaching out further. Three year deals are being done and are being write about and even longer term. So, I think from a customers’ perspective, they are now on board and they are there to do things. From our perspective, I think I would reiterate what I said on this call previously that we managed our portfolio in way to give us the best exposure but also understand that it is a portfolio. And if you see some good opportunities to lock in some of these high midterm TCs, we will evaluate that against our expectations of forward market and if they’re attractive, we’ll put between 20% and 30% of the fleet out on covered basis. But it will be a moving target and a lot will depend on what the TC market is doing and what the spot market is doing.

And the next question is from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Congratulations for the two acquisitions. I am trying to understand about your expansion and the plans of potentially renewing the fleet. You just bought 12 Suezmaxes; you still have in your fleet three vessels which are above 15 years old. Are you thinking of disposing these now that you have already grown the fleet with new tonnage?

That was one of the attractions of doing the Principal Maritime acquisition was the low average fleet age, five and half years, which really helped us to bring down our overall fleet age by 1.2 years. It is on management’s mind that part of our fleet is getting up to that 15-year range. So, the acquisitions we did in latter half of last year and this acquisition that we’ve done just recently that was certainly a factor in our decision making, was looking at the long term health and rejuvenation of the fleet.

And going to the supply side on slide six, we clearly see that supply the next couple of years is picking up. You obviously consider it that is still at very manageable levels at least for 2016. What is the expectation that you have for global oil supply growth next year that is required in order to absorb this fleet expansion? I understand that from what I see there is similar growth, both for 2016 and 2017. So, how much oil supply will have to grow to absorb that?

First, I think your right and we have to recognize, there is an increase over 2015 in terms of supply. But I think as we’ve pointed out, as we move into ‘16 and ‘17, I think a lot of owners, they are going to be facing some decisions around CapEx requirements for ballast water treatment and second and the third special survey costs. You might see some change on the scrapping side. In terms of oil supply, the OPEC minister recently came out and said there is going to be no change in their approach to production. So, our forecast is we’ve -- as we’ve pointed out in 2016, we’re going to have OPEC staying the course. We’ve also got Iran as a potential added supply source. Whether that ramps up to 200,000 barrels a day of actual production or 1 million of production, I will leave the oil analysts to better articulate that one. But my view is it will be a slow gradual increase of supply into the market on top of what was already got coming out of the Middle East.

And in terms of what is required in order to absorb, if I’m not mistaken, there are about 55, 56 VLCCs scheduled for delivery next year. How many of these vessels do you think that they are going to be delivered? And in order for these vessels that they will be delivered, to be absorbed by the market, how much more crude flows that we need to see from OPEC or from other areas of the world?

I think you’ve got 1 million to 1.5 million barrels of demand growth projected for 2016, 2017. So, a lot of that tonnage is going to be required to meet that demand. If you look at where that production is coming on, we expect it to be a mix of OPEC and non-OPEC production. So, I think a lot of it will depend on the source of supply which could impact ton-mile demand as well as low oil prices. If they maintain, you are going to see more storage which will absorb or could absorb a significant portion of these deliveries coming in. The view is the especially for the Suezmaxes, ton-mile growth just from the diversity of supply source, will eat up lot of supply that’s coming on line.

Is there a point that you might be concerned that instead of building up inventories like it’s happening right now, we might see that the demand is going to be met by existing inventories and bringing down inventories? And how long do you think that if that happens, it can sustain without -- with demand lagging -- with the supply lagging the demand?

I think what you’ll find is as we move into 2016 with political instability in various regions and potential supply disruptions coupled with the lower oil price environment that is driving stockpiling for SPRs. I think it’s going to be a volatile market. It will be a market that’s difficult to reach. And we’ll have to keep our eye on the game and make sure we adapt as the market dynamics change.

One last question about the ship-to-ship transfer business. If you can give us little bit more color of how shall we think of the drivers of this business and how stable this business is and how it can grow in the future? And if it’s going to be required significant more capital in order to expand this business?

I think as Vince has already articulated it, it is a fairly stable business, it doesn’t get materially affected by seasonality. It’s a global business with steady cash flow. I think at the moment on a global basis, SPT is number two in the world. So, we’ll be looking to grow our market share from that. And in the U.S. Gulf, at the moment, there is significant growth that we think we can take on to the full service lightering piece. So it’s a business that -- it’s not a large business but it does provide a steady and decent cash flow of about $10 million to $12 million of EBITDA per year. And we would look to grow that year-over-year, without a lot of capital expenditure required.

The next question is from Omar Nokta from Clarkson Capital Securities. Please go ahead.

First, just on the Principal deal. When should we assume that that’s going to -- when’s the closing on that? And then also -- sorry, if you’ve addressed this but are there going to be any vetting requirements that we need to take place on that fleet?

The acquisition is done. The individual vessels will deliver over the course of the next three months and should all be integrated into our fleet by the end of October. Sorry, your second question was around the technical management.

Yes.

Our intent is to as some of the ships go into dry-dock, we’ll transition those ships over to our technical management. But over the winter period, those ships that will continue trading, we’ll lead technical managers on board to make sure that we don’t have any issues around vettings. And we’ll wait until sometime later in 2016 to meet that technical transition.

And then also just on the 16 dry-docks for the second half of this year. What’s the estimated cost on those?

Varies depending on the age of the vessel and the modifications that we’re putting in place on them, but anywhere from $1.5 million to $2 million for some of the older units.

And then finally, you guys -- with the ATM, you’ve issued 37 million or so thus far. What are your thoughts now that you’ve definitely got liquidity and you’ve made these transactions the markets on fire? What are your thoughts on ATM; are you still planning to tap into that; any thoughts on closing that early or potentially expanding it?

We still have roughly $40 million available under the existing ATM or cost. [Ph] As you said, we did about 37 in June. So that is available for us. I don’t think we’ve made any decisions yet on that. At the same time, as I mentioned, we’re generating a lot of free cash flow as we’re speaking and without having to do any more equity issuance out of the ATM. So, we have that flexibility. We haven’t made any decisions on that.

And the next question is from Shawn Collins from Bank of America. Please go ahead.

So, you’ve been very active recently, to the announcement of ship-to-ship transfer business, can you just talk about how that opportunity arose and mention what the prior ownership percentage was between Teekay and I.M. Skaugen? Not sure if said that right. And lastly will that operate as a standalone unit or do you foresee that that will help your spot shipping business in anyway?

Some good questions. The rationale really around the ownership or the acquisition was it didn’t come out of the blue. Teekay Corporation has obviously been 50% of that joint venture with I.M. Skaugen. So, there is material knowledge around how the business works and things of that nature. I think a big impetus to the change has really been my coming into the organization a year ago and my background having run a lightering business in the U.S. Gulf. When I looked at Teekay’s participation, I felt that with TNK taking on the ownership of the entity outright as a fully owned entity, I felt we could do a lot of things that the joint venture wasn’t doing wasn’t capable of doing. So, it’s really I see a potential there. Customers that I’ve spoken to in the past year have looked at the market. And at the moment one of the -- the only participant in the market is about 90% market share. And both the customers I’ve spoken to and when I was a customer 15 months ago, customers don’t like only having one option on table. So, I think there is -- we’ve been encouraged to look at this and we’ve been encouraged by the support we are expecting to get from customers to help us grow the business. So, it’s something that we felt would be immediately accretive. It fits in well with the rest of our Aframax program. And from a strategic standpoint, we view this as a capability to build up a hub in and around the U.S. and South America where we feel that with Panama Canal widening and potential for U.S Gulf exports, if there was a way where we could secure a steady flow of cargo access to keep our ships in and around this area, we feel that that will pay dividend over the long-term. So, it had strategic benefit; it had immediate synergies with the business that we already had. And we’ve got a lot of knowledge around how to do this well. So that was the premise behind it.

Can I just clarify, did you say that the number player has 90% of market share; is that correct? And if not, what would the market share of the number one be and the number player SPT?

On the 90%, that’s for U.S Gulf service ship-to-ship transfers; on a global basis it’s a different competitor base that we’re looking at. So, this is purely the integration of Aframaxes with the support service. And I think at the moment SPT has about 10% of the market, 7% to 10%.

In the U.S Gulf?

Correct.

Well that’s very helpful. That’s all from me. Thank you for the time and insight.

And the next question is from George Berman [ph] with J.P. Turner & Company. Please go ahead.

The recent opening of the Suezmax canal, the widening, is that going to shorten some of the distances that you travel?

No, it won’t materially change anything. The additions have been made to the canal in Suez is really a transit time benefit where they’ve cut down transit times from or to about 11 hours now, the transit the canal which is not material impact on how we trade ships or the benefits of going through the canal.

You just answered the other caller’s question, the aftermarket stock offering has not been cancelled yet?

No, our ATM had a initial amount of $80 million of which we used $37 million in the second quarter and for the remaining, $43 million is still available.

If you cancel that offering because there is no need for no more, you’d probably make an announcement to that effect?

Sorry, could you repeat that question?

If you cancel the remaining aftermarket offering, would you make an announcement to that effect?

If we cancel it, I’m not sure if we’re required to make an announcement. I think it will be part of our regular SEC filings which will be filed on a quarterly basis. That’s probably where we would disclose something like that. We have no intention to cancel it. It’s there, it’s flexible tool for us.

Last question, if Iran was to start to exporting oil, how big is a fleet that Iran would bring into the marketplace and/or if you could quantify how many outside of Iran ships would be necessary to say facilitate the 0.5 million daily export of oil from there?

I think Iran’s current fleet VLCC stands at I think 37 Vs which half of them I believe are on storage any given time. In terms of how many vessels will be required to meet any increased production, a lot of it will depend on who buyers are. And really light and heavy you can go in a lot of different directions whether it’s the Europe or to Asia. So we’ll have to wait and see where those barrels -- whether they actually come to market and when they do come to market, who the eventual buyers are.

And recently in Saudi Arabia and the area, several new refineries came on line. And I understand that they would necessitate, they have not a lot more of the MR and LR tankers available to transport the diesel jet fuel naphtha and what have you. Has that had an impact on the day rates as well?

Yes, absolutely. I think [indiscernible] coming on line has given the impetus to the LR2 market, as you’ve seen reflected in our Q2 results for the LR2 sector and what we anticipate will be an even stronger third quarter for that space. So, it’s a new dynamic to the market. And I think we’re well-positioned with the acquisition that we made in December, late last year, earlier this year where we brought in additional four LR2s. We hope to benefit quite well from putting those in that robust trade.

Last question, I’m kind of a new in the shipping market. Could you give me an example of where a ship-to-ship transfer situation was needed?

When you bring in large vessels VLCCs or Suezmaxes into draft restricted locations, such as you have in the U.S., you have to take a volume of cargo off of these larger ship, put it on the smaller ships and transit into those river based refineries, so that’s where you have a significant need for the STS transfer expertise.

[Operator Instructions]. And the next question comes from Amit Mehrotra of Deutsche Bank. Please go ahead.

I had a follow-up question along the lines of the dividend. Kevin, can you just give us some thoughts on how you think the company’s or TNK’s story will develop from here? And the reason I ask it is, a target on the dividend in terms of our percentage of free cash flow or something tied to something like that seems to be where a lot of the public tanker companies are going. But at the same time it also limits your flexibility if you’ve not fully fulfilled your ambitions on where the company -- what the company will ultimately become. So in that context, over the TNK story sort of continue to be a growth oriented story from a fleet expansion standpoint, will it evolve into a dividend or deleveraging story after yesterday’s announcement? Can you just sort of help us out in terms of how you are thinking about that? And what your ultimate ambitions are for the company?

First of all, on the dividend, I think Vince has already articulated in terms of the structure of it which we haven’t gone through with the board. So, we can’t comment on that. But I think looking forward in terms of where is TNK going. Obviously our goal and our desire is to be the world’s leading tanker brand. And we’ve really secured that place in the mid-sized tanker space which we’re going to continue to concentrate on. And the acquisition that we’ve just taken on yesterday really fits into that space. At the end of the day, our view has always been to run this company to create value and accretion for our shareholders. So, whether it’s through fleet growth or buying businesses allow us to stable cash flow to whether two tanker cycles, I think you’ll continue to see us look for opportunities that align with what our core strengths are with always the view of creating value.

Just one follow-up if I may and you had mentioned in your prepared remarks the benefits of scale that the acquisition brings. And I think the benefits of scale sort of start to phase out at some point given the cost structure characteristics of the business. But certainly moving from 10 ships to 22 ships on the Suezmax side does offer some opportunity for cost savings and synergies. Can you just elaborate more on that and maybe what type of benefits you may be able to achieve sort from an OpEx cost standpoint?

I think I’ve said this on previous calls. We’re not growing for growth stake and we’re not aiming for having more ships than anything else which as a statement, it’s more around how do we build a portfolio of assets that we feel comfortable deploying in a market where we can generate good strong revenues and returns to the shareholder, utilizing an expanded customer base. So, the fact that we’ve gone from 10 to 22 Suezmaxes is really a statement around our comfort that with our customer base and support that we’ll get and the expanding trade-routes that we’re seeing in this Suezmax sector that there is areas of the world that we’re not penetrating today that we can go into and that we can fully deploy a fleet of the scale.

There are no further questions at this time. Please continue.

Okay. I’d just like to thank everybody for joining us on the call. Obviously we’re extremely excited about the two recent acquisitions and the attractive price that we were able to attain on both of those. And we look forward to showing you the results of those two acquisitions in future quarters. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines. And have a great day.