Teekay Tankers Ltd. (TNK) Q3 2016 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Teekay Tankers Ltd’s Third Quarter 2016 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you'll be invited to participate in a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. And 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'll find a copy of the third quarter 2016 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 differ materially differ from those in the forward-looking statements is contained in the third quarter 2016 earnings release and earnings presentation available on our website. I’ll 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 are Vince Lok, Teekay Tankers' Chief Financial Officer; and Christian Waldegrave, Head of Strategy & Research at Teekay Corporation. During today’s call, I will be taking you through Teekay Tankers’ third quarter 2016 earnings results presentation, which can be found on our website. Beginning with our recent highlights on Slide 3 of the presentation, Teekay Tankers reported an adjusted net loss of $1.5 million or $0.01 per share in the third quarter of 2016 compared to adjusted net income of $40.3 million or $0.30 per share in the same period of the prior year. We generated free cash flow of $26.6 million during the quarter compared with $59.4 million in the same period of the prior year. Our results during the quarter were impacted by the lowest quarterly crude tanker rates in three years. Various factors affected rates including normal seasonality reduced all supply due to temporary outages in key export regions and lower refinery throughput. Many of the seasonal factors and temporary outages have now diminished or passed resulting in higher tanker rates so far in the fourth quarter compared with this past August. I will touch on this in more detail starting on the next slide. In accordance with our variable dividend policy, Teekay Tankers declared a dividend of $0.03 per share for the third quarter of 2016 representing the minimum quarterly dividend. The dividend will be paid on November 18th, 2016 to all shareholders of record as of November 14th, 2016. In October, Teekay Tankers agreed to sell its last remaining MR product tanker and two 2002-built Suezmax tankers for total combined proceeds of $47 million, which along with the cash flow generated during the quarter is expected to further deliver our balance sheet to below 49% on a net debt to book capitalization basis. Since reporting earnings in August, we have concluded - we have continued to grow our ship-to-ship lightering business having secured two new significant lightering contracts with major oil companies for periods of up to 24 months. These contracts help strengthen our position in the lightering business by providing us with cargo volume to employ up to three Aframax vessel equivalents per year. These contracts are expected to commence in the fourth quarter of 2016 and will bring Teekay Tankers’ total ship-to-ship lightering cargo volumes up to five Aframax vessel equivalents per year. Our lightering business supports our growing U.S. Gulf presence and enhances our ability to earn above market returns for our fleet in that region. Turning to Slide 4, we look at developments in the crude tanker spot market. Crude tanker rates fell to three year lows in third quarter of 2016 as normal seasonal conditions were compounded by a number of other factors. Firstly, a series of Atlantic basin oil supply outages led to a reduction in cargo volumes most significantly of which was a reduction in Nigerian crude oil supply. Nigeria suffered a series of militant attacks on oil infrastructure during the first half of the year. And by the third quarter, this had resulted in 800,000 barrels per day of production being offline. This reduction in Atlantic crude exports had a negative impact on mid-sized tanker demand and also impacted average voyage distances as Asian buyers turned to shorter whole Middle East volumes to fill the gap left by the lower Atlantic supply. Additionally, global refinery throughput was significantly lower during third quarter as high crude and product inventories coupled with seasonal maintenance led to reduce demand for crude from refiners in both the Atlantic and Pacific basins. Since August, rates have however rebounded in tandem with more positive oil market fundamentals and as we move into the seasonably stronger winter months, we feel confident that rates will increase further. Rates in the winter are typically the strongest of the year as refiners’ ramp up imports and bad weather leads to increases in vessel delays and voice turnaround times. The return of Atlantic basin supply volumes is also helping to boost mid-sized tanker demand as I will detail in the next slide. Turning to Slide 5, we look at the oil supply situation in the Atlantic basin. As described in the previous slide, Nigeria experienced just over 800,000 barrels per day of outages during the third quarter, which had a negative impact to mid-size tanker demand in the Atlantic. However in recent weeks, we have seen the gradual return of some of this production with output reaching approximately 1.9 million barrels per day at the end of October, due to the restart of various export grades. The return of other crude streams by the end of the year should further boost exports. Though we know that the political situation in Nigeria remains uncertain and we cannot rule out the possibility of further disruptions to oil infrastructure should the situation deteriorate once again. In the Mediterranean, mid-sized tankers are finding support from an increase in Libyan exports and the long awaited first cargos from the Kashagan field in the Caspian Sea. Production in Libya, which was averaging just 300,000 barrels per day during the summer months has recently rebounded to almost 600,000 barrels per day due to the restart of certain oil fields and the reopening of key export terminals. The Libyan government is aiming to reach exports of 950,000 barrels per day by the end of the year, which would be positive for Aframax trade in the Mediterranean region. Similarly, the ramp up of exports from Kashagan via Black Sea and Baltic Sea ports should also provide support to mid-size tanker demand. Initial volumes from Kashagan are relatively small, but the operators have indicated their intent to reach full production of approximately 400,000 barrels per day by the end of 2017. In sum, we're encouraged by the return of Atlantic basin supply as we approach the seasonally stronger winter months, and we believe that these additions will give further support to mid-size tanker demand as we move into 2017. Turning to Slide 6, we look at our outlook for tanker market fundamentals in 2017and beyond. The tanker market faces some challenges in 2017 the most prominent of which is elevated fleet growth as the order book delivers. As shown by the chart on the top left, the mid-size sectors are set on the go above average fleet growth in 2017 particularly in Suez ax’s sector where we estimate growth of around 8% during the course of the year. However, this period of fleet growth should be relatively short lived. As a lack of ordering over the past year due to constrain financing should result in significantly below average fleet growth once again in 2018. While scrapping has been low over the last two years, we anticipate that this will accelerate in the coming years as more ships approach the 20 year mark and this new environmental regulations impact the economics of trading older vessels beyond their third and fourth special survey dates. Turning to oil market fundamentals, we are encouraged that global oil demand growth is forecast to remain at $1.2 million barrels per day in 2017, which is similar to the growth seen this year and in line with long term averages. With regards to oil supply, we will be watching the outcome of the OPEC meeting in Vienna later this month as the group tries to solidify previously announced plans to reduce oil output to a range of 32.5 million to 33 million barrels per day. Whether OPEC members can agree to and more importantly implement such a cut remains to be seen however as many countries are seeking exemptions for a variety of reasons. Should they agree a cut, it appears that the Middle East Gulf nations led by Saudi Arabia would have to shoulder most of the burden. While this would result in a reduction in crude volumes available for transportation, it is not necessarily negative for crude tanker demand as it could lead to more crude volumes being transported long haul from the Atlantic to Pacific basins as Asian buyers source replacement barrels from further our field and development which would be positive for mid-sized tanker demand. In sum, we acknowledge that the tanker market faces some headwinds during 2017. However, we believe that these headwinds will be relatively short lived and in the medium term fundamentals for crude tankers remains positive. Turning to Slide 7, I’ll wrap up with an update on spot tanker rates for the fourth quarter of 2016 to date. Based on approximately 47% and 32% spot revenue days booked, Teekay Tankers’ fourth quarter to date Suezmax and Aframax bookings have so far averaged approximately $19,800 and $16,200 per day respectively. For our LR2 segment with approximately 35% spot revenue days booked, fourth quarters to date bookings have averaged approximately $8,600 per day. In closing, we expect the tanker market to continue to improve as we move through the winter due to normal seasonal demand increases, typical weather disruptions and port delays coupled with the return of Atlantic basin oil production. This should translate into an increase in our earnings and cash flow, allowing us to further strengthen our balance sheet as we move forward. With that operator, we're now available to take questions.

Thank you. [Operator Instructions] We’ll hear first from Jon Chappell, Evercore ISI.

Thank you. Good morning, guys.

Good morning, Jon.

Kevin, first question for you, just a little bit clarity on the new ship-to-ship lightering business, the two contracts then you said providing cargos up to three vessel equivalents. So how does that work as far as your fleets concerned, you take three of your own Aframax is that you would consider be with the core fleet and then you use those to service that business and we think that is kind of a charter out contract or a contract or do you go out to get other tonnage than to meet the requirements in that contract?

It’s pretty much how you've described it. We've got five dedicated ships that we have sort of assigned to the lightering trade. That will be focused on that part of our business. But given the legerities of the scheduling, we obviously into depend on others and that's where we draw from our Aframax RSA pool that trades in and around that region, and we have the ability to in-charter ships on a spot basis for individual lightering or for short periods of 30 to 60 days to help us cover some of that increased demand that we see.

And as we think about what those contracts that are in, is it something in the fixed rate room or you just look at TD9 as the proxy for kind of Caribbean movements or is it something completely different?

Well, we take a portfolio approach to our lightering businesses. Some of our contracts are fixed rate, and they would be more akin to the time charter rates that we've seen earlier in the year sort of in the mid to high 20 range. We've also got some floating contracts that provide a premium over and above expense that sort of tags TD9. So it's a combination of both of that. I think from a modeling perspective, it would be fair to assume that if you look at TD9 as a proxy and put a bit of a margin on top of that, that would give you a good guide on where we should be coming in.

Okay, that makes sense. And then to the vessel sales specifically to Suezmax is because obviously the MRs went a core segment. What was the thought process behind that, was it just the principal ships were kind of replacement for some of the older Suezmax tonnage and if that was the case, how do you think about the 390, 399 built Aframax, should we think about those as being somewhat upward sale as well?

Well, on the Suezmax specifically, yes when we did the Princimar deal last year, we were focused on our existing Suezmax fleet and looking at the older tonnage and trying to decide what point do we pair down the older ships. And I think given the outlook for 2017 and these older ships having dry doc CapEx in the near term, we felt it was better to let those go and reduce the fleet a little bit. On the Aframax side, we look at the whole fleet on an ongoing basis. And at this point in time, we see those older ships actually helping our lightering business. So for the time being, we're going to maintain those. But the right opportunity comes along and the right valuation seen, our - we evaluate that things change then obviously those would be prime candidates for future sale.

Right. Okay, and then just one last quick one maybe for Vince. You guys used to have a nice little debt amortization team on the presentation. I know you've pushed back the maturity on big chunk of that which was at for late 2017, but can you just give us an update on the debt amortization schedule, just I guess for the fourth quarter and 2017 as we think about managing cash flows?

Sure Jon. You're right. We did the refinancing last year which stretched out our debt amortization schedule. If you look at 2017, the run rate amortization is roughly around $120 million. It does go down a little bit after that in 2018 closer to about $110 million. We do have a balloon that is maturing in November 2017 that was the old revolver. But as a result of these recent sales that facility will be retired in the next few months upon completion of those vessel sales.

Got it. And then fourth quarter would be maybe just a 120 divided by 4, just $30 million?

Roughly, it’s about $40 million, yeah, $30 million to $40 million.

Great, thanks Vince. Thanks Kevin.

Thanks Jon.

Thank you. Next we’ll hear from Noah Parquette, JP Morgan.

Thanks. Can you talk a little bit about what you saw in the other two market that cause the weakness back in October and why it’s recovered. And I guess give us an idea of how many ships are trading dirty and clean in that market now and how changes?

Yeah, I think as you seen in the third quarter was weak for the LR2. I think there was a combination of the, R are not being there, LPG import replacing NASA as a source resource. And I think also looking at the new deliveries in the order book across pretty much all the segments, we - the order book whether is LR2, Aframax, Suezmax or Vs has tended to impact more in the third and fourth quarters that it has in the first half of the year. So I think beyond coming tonnage has impact to the LR2 primarily because you’re seeing Suezmax and Vs even being loaded with gas whole cargos which takes away one of the runs for that fleet. And Christian, do you have anything to add on number so ships trading clear and dirty.

Yeah, the number of ships on a global basis trading clean LR2 is about 200 ships. That’s about 15 more than we had at the start of the year. So it has been somewhere around 8% growth in the number of clean trading LR2 this year which again it’s one of the reasons why the rates have come under pressure.

Okay. And then it looks like you’ve charted in an additional Aframax. Can you talk about, what you think about your operating leverage, I mean obviously you guys are looking on the increasing financial leverage, but is that - as the Aframax just going to offset that or I mean is it just a view on the marketing and how do you think about balancing those two?

I think we’ve said in the past that we had a rather large in-charter portfolio when the market really strong. And as the markets come off, we’ve pared that dime quite significantly. But we’ve never said that we’re going to get out of the in-charter book. And I think I’ve said previously we’ll use that as an opportunity to trade in and out of the market as we see opportunities. So this was a vessel that was in the right position at the right point in time that we felt we could take advantage of and deploy it in support of our growing lightering business. And so that’s why we made that decision. But it’s - again I would repeat it’s the in-charter portfolio is something that we use as one of our levers depending on the market, the forward view and where we see our own tonnage being deployed. And there will be in and out of that market potentially doing in and out trades to make an extra margin.

Okay. Thank you.

Thanks.

Thank you. We will take our next question from Mike Webber, Wells Fargo.

Hey, good morning, guys. How are you?

Good morning, Mike.

Kevin, I want to just follow-up on a couple of John’s questions around the ship-to-ship lightering business. It sounds to me like that the pricing is I think of like a COA and I guess my questions got a twofold; one, it looks like you’re including on a go forward basis that ship-to-ship lightering revenue within the spot portion of your fleet, which makes sense I think we’ve seen that elsewhere. But I’m just curious is that - I want to - how big a business do you think that can become; and two, do you think that over time, does it make that kind of that kind of a spot leverage put up a bit of a lag on that spot leverage maybe or make you guys maybe a bit less levered to the spot market than maybe that’s might otherwise imply?

Yeah, I mean if certainly when we entered the business, we saw this is a way to help manage our portfolio. And as I’ve spoken about many times before by using different levers a different point in the cycle, lightering just gives us some other I think that levered bit. But in this market is an example provides us good above market cover where the time charter market may have quite and down a little bit. So we’ll play that as we see fit, as we go through cycles. But I think it’s - there is more room to grow. I think our last estimate was roughly around 25% of that market. So I think we - as we look forward there is room to grow that business. But the focus will be on providing us reduced spot exposure especially in the Caribbean market, so deploying more ships to support that business when the returns are higher than spot market.

Great. Okay. That makes sense. The –in terms of being, you are 25% of that market, is this I guess tough dealing into your last comment there. Is something where you kind of, you’ve on a single and people are basically approaching you knowing you do this kind of business now, are there something where you are kind of actively on the margin kind of seeking out the stuff kind of headed defined kind of the fine degree exposure within that particular vertical?

No, we did an awful lot of work prior to the acquisition to understand how we would go about this. And the feedback we got back from our customers was given our operating excellence that we’ve built a reputation on the Aframax, Suezmax. It was translating that into can we do the same thing in lightering. And we really encouraged by our big customers and said yes, we would like Teekay in that business to provide the standards and quality that we bring with it. So we knew we were going to get the support prior to going into the business. And now it’s been a case of actually proving our capability. And it’s been just over a year since the transaction and it takes a while to prove that capability. So I think we got a lot more traction in the third quarter and I would like to see that continue over the course of the next couple of quarters is as more customers talk to us about contracts and also existing customers start giving us more volumes based on our performance.

Okay. Now that’s make sense. Just one more, I’ll turn it over. But around your commentary earlier around the Suezmax sales in the slightly older assets and you know the read through there around I guess the in-house view on asset values right is not particularly bullish if you know the dry dock expenses associated with those you know kind of help to drive the economic decision to sell the asset right which are kind of back end of it that kind of forward slope you guys have put on the asset value from here, but I know that’s a bit of an oversimplification. I think Vinci mentioned using the proceeds to pay down a revolver. I’m sure there were lots of assets that kind of go into that kind of decision. But maybe if you can kind of expand on that a bit and kind of talk through the different drivers that drove that really that drove that sale whether there was anything simply beyond the pure economic of what you thought the ship was worth to discounted cash basis and there the ships are worth rather and then how you see the asset value care kind of moving forward?

To be honest with you Mike, you’ve covered most of the aspects that we would look at. We - a as I said we would when we did the Princimar deal, we were looking at our fleet size. And bringing in these new tonnage, we obviously look at the older tonnage is it time to take them off the table. Both the ships were due for dry dock in 2017 and from a cash flow perspective that was a consideration. We are sticking to our strategy of delivering the balance sheet and given the revolver bullet payment was due at the end of the year that the end of 2017 that also flattered into the consideration of now with the right time to bring, send those ships out and deliver or remove that revolver sorry.

Great.

We still got them for another few months. They don’t deliver until the first quarter 2017. So this market should hopefully pick up, we’ll enjoy some increase cash flow over the next couple of months.

Fair enough, okay. Kevin, I think that just mean the poorly phrased question on my part, but maybe kind of coming at a different way, would you have sold the assets if you didn’t have the revolverpayment coming up and then what are your expectations for asset movement, asset values over the next year or two, with a gradual slope upwards or do you think where added to your bottom here, do you think we kind of grind along a trough for a while?

I think we would have sold the assets anyway. I think we’re looking to reduce our spot exposure. We’ve got a large fleet in the Suezmax arena and given our forward view, we probably would have done it anyway.

Okay.

In terms of your second question, can you just repeat that one?

Yeah, just as an overall view on asset values from here, do you think we - another 5%-10% down from here, or do you think we just kind of screwed along the bottom or improve in 2017, just curious what your thought there?

I think where we’re bouncing along the bottom, whether that means further dip of another 5% possibly. But I think we’ve seen the big declines. I don’t think we’re going to continue on that same trajectory. So whether it moves 5% lower from here or not, we’ll have to see but I think we’re pretty much there.

Okay. All right. I appreciate your time, guys. Thank you.

Thanks, Mike.

We’ll hear next from Gregory Lewis, Credit Suisse.

Okay. Hi, thank you and good morning.

Good morning.

Kevin, not a believer the STS business, it seems like it’s been a focus, but I mean I guess as we think about lightering activity and I believe you’re primarily in the Gulf of Mexico, this wider into the Gulf of Mexico has been around for years. So is there something that is changing where there are, is it infrastructure related that is driving increased more lightering opportunities or is Teekay just going out in steeling business from other players?

I think the dynamics of the market is changing, but before I get into that just to highlight that the SPT transaction that we did last year wasn’t just focused on the U.S. Gulf lightering business. We do STS support services globally. And where we also do LNG consultancy work in terminal operations through that. So it’s not just a U.S. Gulf factor that drove us to purchase that company. In terms of the U.S. Gulf itself, the market dynamics are changing, shale oil production has brought different dynamic to that business. And as we see U.S. Gulf exports ramp-up and ramp-down depending on market conditions that adds to reverse lightering volume which is essentially the same operation done the other way around. But there was also encouragement from our customer base that for a period of time there was essentially a singular service provider and no one would be like putting all their eggs in one basket from a risk respective. So we’re definitely encouraged to play a bigger role in that market and so some of it will be taking business away from others and some of it will be through growth of different lightering operations that are required in the region.

Okay, great. And then just my other question would be on the Suezmax market. You alluded to in your press release about some volumes coming back online. We’ve seen the VLCC market moved significantly higher in the 40,000 - I believe the spread between the Suezmax’s and VLCC’s is about 3x. Is there anything that we could see happen in the next couple months that would maybe converge that spread between Suezmax’s and VLCC’s or is just new paradigm we’re going to have to get used to?

No. I think what obviously this the VLCCs have benefited from for more middle east exports and the supply disruptions out of West Africa has hindered more in the Suezmax side than anywhere. But I think as you moved the Suezmax’s fleet from a concentration within the Atlantic to further field, they will start encroaching on the mend lifting’s with VLCCs and is that droves tonnage out, it reduces the supply balance in the Atlantic which with production coming out of the Atlantic hopefully on the increase. You’ll see that the Suezmax is eat back some of that differential with the bigger ships.

And is that something that is Teekay starting to through contracts or repositioning starting to, is that something that at least TNK is starting to, is in the process of doing?

Well, we actually started this process a while, but we’re in strategically we pulled in our Suezmax pool in-house to combined with our Aframax commercial desks. And the view there was really to take our Suezmax fleet and spread it more globally that it was perhaps historically. So looking at AG West Cargos looking at West to East Movement, really spreading our own fleet list if you will. And I think that’s had a positive impact on both our customer coverage and our - the returns we’re getting from the market.

Okay, great. Hey, thank you very much for the time, gentleman.

Thanks, Gregory.

Thank you. [Operator Instructions] Next we’ll hear from Spiro Dounis, UBS Securities.

Hey, Kevin and Vincent, thanks for taking the question. Just wanted to - you know Kevin you mentioned reverse lightering before, I’m curious in terms of what you’re seeing in the Gulf, I guess WTI contango is really widened here in the last week or so. And I guess I’m just wondering are we seeing any sort of increase in terms of loading storage in the Gulf, has that really ever happened in a big way at this point, I am just curious, what is the view on the ground is?

Yeah, we haven’t seen a lot of it in the immediate term. We are seeing a growth in long haul barrels coming in and I think that was a function of the uptick earlier in late September, early October a lot of barrels coming in from the Middle East. So we’re seeing the impact of that now and that’s why you’ve got the Caribbean market spiking up close to $30,000 a day on the Aframax’s. But I think the - looking back historically from a past life when I was heavily involved in the lightering business itself, there has been periods where the oil traders have sought to use the U.S. Gulf as a trading region and a trading book to store assets on Vs and move cargos between Vs. So I should anticipate if we do get a stronger contango and the storage play does become a larger function of the market, the U.S. Gulf will play a significant role in that and that should drive more volumes for us on the lightering side.

Got it. And then you mentioned before I hear, your expertise in the obviously on Tanker market, sort of segue you into this lightering business and you may have been asked this before so I apologize, but in terms of what the next say where could be obviously a big presence in the Gulf might lend itself to the challenge act, is that something at some point be fitting in for the strategy or no?

No.

No. Okay, fair enough. Last one for me just from my perspective, I think the guidance you gave originally with the ship-to-ship transfer was EBITDA run rate about $10 million or $12 million and as you tack on these Aframax’s and sort of dedicate into this, is $10 million to $12 million like fee based and then beyond that as you add an Aframax to it, whatever they got on a charter sort of incremental at 10 to 12, is that the right way think about it?

Yeah, I think if you if you look at the lightering business as a whole, it kind of have to separate the support services that Kevin refer to from the full service lightering, is the full service lettering business is very integrated with our existing Aframax trading and as we mentioned that’s now up to about 5 Aframax equivalents. So that’s part of what you see in our - I guess in our first almost our spot segment. In terms of the support services, the EBITDA there I think we’re gradually wrapping that up. I think for 2016, we’re looking at EBITDA around to a $5 million or so. And we expect that to increase next year probably in the region of maybe about $7 million. So we’re gradually ramping up the support service but the full service lightering I think is probably doing a little bit better than what we originally expected and we’re continue to chance new contracts.

Got it. Great to hear. I appreciate the color. Thanks, guys.

Thank you.

Thank you. And our next question comes from Magnus Fyhr, Seaport Global.

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Hi, Magnus. Yeah, I think we seen a ramp-up certainly in the first half up to I think it was June, there was a lot more Aframax volumes moved out of the U.S. Gulf, primarily to Europe and also Latin America, Caribbean as they sort of combined stems with heavier grades and move them out for the Far East. So it was a positive trend. I think it’s taken a breather in the third quarter. It has come off a little bit from what we are seeing in the first half. But I think it’s something that U.S. Shale oil is a crude oil but one of the traders I was talking to last week was mentioning that if some of the refinery still don’t fully understand within their cargo mix or their feet stock mix, so I think we’re seeing a lot of experimentation at the moment. So we are going to get vagaries from month to month in terms of where those cargos are destined and how buy them. I think it will take a while before that settles down and we see some consistency within the trade patterns. But in the meantime, we are still seeing the opportunities in the Aframax is to do think like reverse lighters and longer haul exports.

And refresh my memory as far as going up raising this trade. I mean there is talks about the increase and the capabilities to export on the loop platform and other ports. What looks besides that?

The last I understood on the topic was it hadn’t been much movement other than the public commentary that there where something that would like to look at. But in terms of impact to our business, we haven’t seen it thus far.

Okay. Just one last question, on - you mentioned the Libyan exports potentially increasing by the end of the year, is that a market that you will go into right now or is that would you like to see I guess as far as safety going in with your ship there?

Yeah, this point in time, we actually don’t have any ships in that area where we are concentrating more in the Baltic in the North Sea because the returns are higher. And the Meds taken a bit of a breather recently, so we haven’t deployed any tonnage there. So it’s not something we’ve run into. But certainly as production increases, we’ll be keeping an eye on safety and the risk of going there. And if we from a risk standpoint, we are comfortable than that’s certainly a trade that we would like to take part in.

Alright, thanks. Thanks for your time.

Thank you.

[Operator Instructions] Next we’ll hear from John Humphreys, Bank of America/Merrill Lynch.

Hi, good morning, gentlemen. How are you?

Good John.

I just want to ask a question, I know this has been touched on before, but sort of the accounting of you lightering business. Taking a look at wage expenses on the income statement, it seems from the footnote that about 8.5 million of the 14.9 associated with lightering. If you could sort of walk me through where and it looks the lightering revenue is be include in the voyage charter revenues. If you can just sort of walk through what we can expect as you grow your lightering business to what 4Q sort of voyage expenses and then into 2017, just trying to get a better sense of the run rate as that line items has begun to ramp along with your lightering business?

Yeah, I think to clarify, the voyage expense item on the income statement, as noted in note two to that, it does include the cost of in-chartering vessels that Kevin referred to from time to time to support of full service of lightering business. So that number may vary from quarter-to-quarter. That also includes certain port charges et cetera. So there is about 8.5 million of that like you said in the third quarter. I think going forward, that number probably could increase little bit given that we have some new full service lightering contracts starting up in the fourth quarter. I think you kind of have to look at it on the net basis as we somewhat guided on slide number seven where we’ve included the net contribution from the full service lightering embedded in that Aframax TCE number. And that’s probably the easiest way to model the full service lightering.

Great. Thank you very much. I know hasn’t being to more general on the IMO regulation and if you could just - Kevin, if you could sort of comment on what you think this being for the overall fleet and as asset owners make decisions about sending ships back to yard and build dirty of scrubbers and kind of what this is going to - what kind of impact this could have in 2017 and 2018?

Yeah, I think the IMO stated there softer emissions initiative, we held to the 20-20 date from implementation as opposed to 20-25 and that was based in the study that they undertook to ensure that there will be enough supply of loss over. To my mind if that is truly the case and there is a determination there will be enough supply. I think from an economic standpoint, this shouldn’t a huge impact given the world scale adjust for changes in fuel source and therefore flat rates. I think what it does do though if owners do decide to look at implementing scrubbers, which are high capital expense, you will see owners with older tonnage that are facing third and fourth special survey expenses as well as the potential to have to spend on order treatment implementation toward the backend of the decade. That’s an awful lot of CapEx to put into older ships. So we would forecast that the overall impact would be an increase in scrapping of those older units.

Great. Thanks very much. That’s it from me.

Thank you.

Thank you. And we’ll hear next from John Reardon, Western International.

Hi, good morning. My question was just answered, but I have another one. And that is you know ten years ago, Teekay had a variable dividend then it went to a fixed, then it went back to a variable. As the cash flow improves and I think it will, if the stock price remains at, what seem to be depressed levels. Might there be some consideration to maybe use some of the additional cash flow coming in buyback some stock? That’s it.

Hi John. Yeah, our current dividend policy as you probably know is to pay 30% to 50% of adjusted net income with the dividend $0.04 per quarter. That is our current policy and we currently don’t have any plans to change that. I think as it relates to stock buyback, that’s certainly one of the levers that is available to us to create shareholder value and return capital to shareholders when we have the excess cash. I think right now given some volatility in the market and perhaps some potential headwinds in 2017, we believe it’s prudent to continue to use our excess cash to deliver the balance sheet.

Very good. Thank you.

Thank you.

Thank you. And at this time, we have no further questions in the queue. I would like to turn the conference back over to Mr. Mackay for any additional or closing remarks.

No. Thank you very much for listening in today folks. And we’ll see you in three months’ time. Bye-bye.