Good day. Welcome to the Teekay Tankers Ltd., First Quarter 2018 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 Kevin Mackay, Teekay Tankers Ltd. Chief Executive Officer. Please go ahead, sir.

Before Kevin begins, I'd like to direct all participants to our website at www.teekaytankers.com, where you'll find a copy of the first quarter 2018 earnings presentation. Kevin will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter 2018 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin to begin.

Thank you, Lee. Hello, everyone, and thank you very much for joining us today for Teekay Tankers first quarter 2018 earnings conference call. With me here in Vancouver, I have Stewart Andrade, Teekay Tankers Chief Financial Officer; and Christian Waldegrave, Head of Strategic Research at Teekay Corporation. Beginning with our recent highlights on Slide 3 of the presentation, Teekay Tankers generated total cash flow from vessel operations of $22.3 million during the quarter compared to $32.1 million in the previous quarter. We reported an adjusted net loss of $22 million or $0.08 per share in the first quarter of 2018 compared to an adjusted net loss of $5.9 million or $0.03 per share in the previous quarter. The crude tanker spot rates decreased in the first quarter of the year as OPEC supply cuts and an oversupply of tonnage continued to weigh on the market, which I will touch on in more detail later in the presentation. In April 2018, we signed a term sheet for a seven-vessel sale leaseback financing, which upon completion is expected to provide approximately $36 million in additional liquidity, while also extending our debt maturity profile. I will discuss this transaction in more detail on the next slide. While tanker rates remain at cyclically low levels, our full service lightering business helped mitigate some of the impact as our combined Aframax spot TCE rates were $15,100 per day, which was significantly above the market average rates. Turning to Slide 4, I will highlight the prudent steps we are taking to further strengthen our balance sheet and liquidity position during this period of weaker tanker rates. In April 2018, Teekay Tankers signed a term sheet for a sale-leaseback financing transaction relating to seven modern tankers, including three Suezmaxes, two Aframaxes, and two LR2 product tankers. The…

[Operator Instructions] And we'll take our first question from Jon Chappell with Evercore.

Thank you. Good morning, Kevin.

Good morning, Jon.

A couple of questions on your recent transactions to the extent you can answer them. First, I was just wondering if you can identify which ships were involved in the sale-leaseback, and I ask this not just because it'd be helpful for us to model it, but also as we think about purchase options on those, I think it'd be important to know what the useful life of the ship would be after you could potentially buy them back in three years, and then also as we think about other options for you to kind of understand if other sale and leasebacks or other straight vessel sales would be kind of your older tonnage or your newer tonnage?

Great. I think as I said in my prepared comments, it was a mixture of two Aframaxes, two LR2s, and three Suezmaxes, I think sure we can provide the names of those specific ships offline if anybody's interested in working through the calculations that you’re specifically referring to.

Okay. That would be helpful. And then the other one I want to ask about too, so the charter-ins, they're pretty short-term in nature and you just laid out an industry backdrop where it remains challenging for now and hopefully an inflection point in the back half of this year, but it seems like the charter-ins that you guys had, and I understand one was for the lightering business. So maybe just the other one doesn't benefit from that unless the option is exercised. So in a market where there's cash burn on existing assets, what was the reasoning for taking more ships that are on charter-in right now?

Fundamentally, even though the market remains low given our scale in both the Atlantic and the Pacific, there are still opportunities for us to triangulate around our CoA base. And the in-charter rates on this ship is about $10,000 a day, so as you look at the spot market, the earnings -- they don't give you the clear picture of where we're able to make the extra margin, when we do those triangulations in and around the Pacific for example, and we incurred demurrage at ports that there is still congestion. So on an absolute return basis, we felt that $10,000 a day, it was worth the trading opportunity to still take in the ship and make a margin off of a bit. And so far what we've seen since we took the ship at the beginning of March is she's returning well.

Okay. And then finally, you mentioned also in the prepared remarks that there's some other sale-leasebacks under consideration. You’ve increased liquidity between the dividend and the first seven sale-leasebacks by almost $70 million, how do you kind of feel today about the liquidity situation as it relates up against your market forecast? And should we expect to see more of these transactions executed by the next time you report?

Yes, I think it's a good question. It's something that we are monitoring constantly and engaged with the Board in terms of what our forward actions that we take and which levers we pull. At this point in time, given the transaction we’ve undertaken and the cutting of the minimum dividend, we feel fairly comfortable looking forward based on our forecast of what the rates will look like. But it's the tanker market and it's cyclical and unpredictable and as such, it's prudent for us to look at the potential for the market to not be as good as what we forecasted and line up potential transactions that would help bolster our balance sheet. So, as I said, it's something we continue to monitor, and as we talk to the Board, it's something that we have to demonstrate to them not just what our forecast is, but both the high case and the low case of what could happen going forward and be prepared for that.

Okay. All right. I appreciate the answers Kevin. Thank you.

Thanks Jon.

Moving on, we'll take our next question from Amit Mehrotra from Deutsche Bank.

Hi, this is Chris Snyder for Amit.

Hey Chris.

So in the release you guys noted you have several options available to strengthen the balance sheet further. Should we expect that this just means additional sale-leasebacks or do you guys kind of consider selling some of the older tankers in the fleet as we've kind of seen a bid here for residual values, are there just additional levers you could pull? Any color on that would be really appreciated.

Yes. I think every lever has different opportunities and benefits to our balance sheet. It's really a question of where we see the forward market, the sale-leaseback transaction do give us attractive purchase options that when the tanker market recovers and our balance sheet is stronger allows us to recapture our own scale. In terms of the asset sales outright, once you sell an asset outright, it's gone and there is no upside. So I think we look to the different levers having different impacts and factor in our decision making based on what those impacts are and what our forward view is and what we need to do.

Thank you for that. And when you guys kind of look at the older, the 2003, 2004 built tankers in the fleet, if you were to dispose of them, would you expect that they would just head to scrapyard? Or do you think there would be buyers for those assets that would want to operate them?

I think it's mixed. As we mentioned in our remarks, the scrapping – the average age of the scrapping is actually below 20 years. So we are seeing owners with vessels in the late end of their lifecycle heading to scrap as opposed to selling forward. In the second hand market, there's definitely pressure on older ships in terms of pricing. So the relative benefit of selling onward versus scrapping is definitely leading towards the scrap market. But I think any transaction on an asset is looked at holistically and to see what benefit there is and what price upside we can obtain.

Okay. Yes. Makes sense, and then next, we've been reading a lot about potential capacity constraints at the scrapyards. Can you provide any color on what you're seeing here and if this could become potential headwinds to the strong pace of scrapping that we've seen year-to-date?

Christian, do you want to take that?

Yes. I think with regards to capacity at the scrapyards, that's not so much of an issue. And suddenly at the moment you've got India and Bangladesh, the Pakistan coming back into the market as well, which would alleviate some of the pressure and offer more capacity. What we've seen this year is that scrapping was pretty strong through Q1 as Kevin said about 8 million deadweight, it has slowed down a bit, but certainly we're still seeing pretty regular sales of ships going for scrap. So I think it's going to be more a function of how the freight market operates through the summer versus the scrap prices can offer as opposed to the capacity. I don't think capacity is going to be a major issue for the rest of this year.

Okay. Yes, makes sense. And then just quickly following up on that. So far the high majority of the scrapping has been on the VLCC side, I mean not quite as much on the Suezmaxes and the Aframaxes, and I was kind of wondering what do you guys think is driving this? Is this just that the smaller segments, the rates have obviously been a little bit more resilient or is it just the scrapyards kind of have their pick and you want the biggest vessels with the most scale?

Well, I think, I wouldn't necessarily agree that it's predominantly been VLCC of the scrap. There's been over 20 Aframaxes have headed to the scrapyard and I think around eight Suezmaxes. So it's – I think it's scrapping is seen through all the segments as owners come up to decision making time around, dry docking costs and potential extensive CapEx costs around ballast water treatment systems and the potential for what happens in 2020. So I think it's not just focused on the V markets, it's focused across the fleets with every owner looking at the same tissues in parameters.

Okay, thank you for the color. That does it for me, and thanks for the time guys.

Thanks, Chris.

Moving on, we'll take our next question from Magnus Fyhr from Seaport Global.

Yes. Good afternoon. Just one question on the Aframaxes during the quarter, you mentioned that they were boosted by strong performance from the lightering business. This something that you see, continue through a second and third quarter or is this just a one-time event and also if you can comment on the longer-term prospects for the lightering business given the recent developments on increasing capacity for U.S. exports?

Yes. Good question, Magnus. The performance on the Aframax fleet in terms of the volumes we're seeing for the U.S. Gulf lighterage seems to be fairly steady. So I would imagine that that fleet will still perform at a premium to what the average spot market does in the other markets around the world. So in terms of the forward view on developments, there has been some news around LOOP and Corpus Christi, some terminal builds there. Certainly I think there is investment going to take place to increase the flow of exports out of the U.S. Gulf and obviously it is cheaper to get those barrels onto larger ships. Having said that, you have to bear in mind that 70% of our volume is still import based and I think as a lot of people focus on the U.S. export story, they're forgetting that there's a constant 5 million barrels a day that they come in from long haul crude that need to be lightered. So I think the longer-term prospects for lighterage is steady to strong, but we are going to see development of bigger birth that allow certainly Suezmaxes and potentially down the road, some VLCCs. But I think a lot of these projects, at this point in time are still sourcing financing and some of the projected startup dates may move around as we go forward based on their ability to get federal funding and such. Certainly, an interesting space for us to be in, as you've seen, it's been very accretive to our, to our performance.

Right, but if a 70% of your business or of the volume is import based; wouldn't that also be impacted by opening up some of these ports for export, would they only be export terminals? Would they have opened three imports as well?

Our understanding is the configurations in some of these pipelines. It's all looking at export base.

Okay, very good. Thanks for clarifying

Yes.

[Operator Instructions] Moving on, we’ll take a next question from Fotis Giannakoulis for Morgan Stanley.

Yes, hi, guys. A little bit more of a modeling question. Can you give us your guidance about dry dock expenses and what it's going to be the ballast water, expenditure that you’re forecasting?

Hi, Fotis. In terms of ballast water, maybe starting, there, obviously nothing into 2018 for ballast water and for 2019 we have approximately $18 million to $20 million, which we have allocated or forecasts for ballast water in 2019. However, we are looking at the trading pattern of those vessels and the equipment availability on those vessels and it maybe that we don't need to fit ballast water on those. So I would say the range is probably from zero up to $18 million to $20 million depending on how things go. In terms of dry-docking this year, we've got – if you look at Page 16 of the presentation, we have two vessels scheduled for Q2 and then another roughly 8 for the remainder – sorry, another 10 for the remainder of the year. So we're looking at 12 overall and assuming a couple of million dollars per dry dock is probably reasonable on those.

Thank you very much. And your Aframax rate that you reported that they have been well above the market. I was trying to understand, is this due to triangulations that you did? How do you explain this outperformance? Any CoAs that you might have? And also, if you can give us a range of the earnings that you have – that your fleet has earned in each category based on the age of the vessels? How would you – have the modern vessels got $2,000 or $3,000 more than older vessels?

I think, your first – or the last part of your question, Fotis, we do, do the analysis. We don't have it on hand. It's certainly something that we can take offline with you. But in terms of vessel age versus performance, there's a lot of factors that can come in on a quarter-by-quarter basis depending on where the ship ballast is in from and what kind of voyage she’s able to procure next. So it isn't a direct on a quarter-by-quarter basis, a direct correlation between age and TCE. In terms of your first question around Aframax performance, we highlight quite clearly in the presentation and my remarks, the boost to our earnings came from our U.S. Gulf full service lighterage business. And that is based around contracts of freightment as well as spot lighterings that do pay a premium for this specialized service that we provide to our customer base.

All right. And can you remind us again – can you give us an idea of what is the cost of a reverse lightering right now on a dollars per barrel for a U.S. exporter?

It varies, Fotis, on what kind of ship we’re using, where the lightering area is, and what kind of volume the customer wants us to take out of the port. So I can’t give you a precise per barrel costs right now.

Is that a range or an estimate that you think about the U.S. exports that will have to – the average per barrel cost for U.S. export in addition to the freight cost from the U.S. to Asia?

Well, if you look at oil price spreads, you got an $8 spread between WTI and Brent, so your shipping component, long-haul plus the lighterage has to be within that band. So I would – at a rough estimate, depending on, again, where you're loading and how many barrels you're putting on board that you’re talking about $1 to $3 per barrel potentially.

That’s very helpful. Thank you very much.

Okay. Thanks Fotis.

Moving on, we'll take our next question from Ken Hoexter from Merrill Lynch.

Hey, great. Good afternoon. Just you mentioned the shift of tonnage over to the Atlantic Basin, is that something that is still going on and could continue to pressure rates, is that shift done. And yes, I guess, I'll leave it – leave the first one there.

Sorry, can you repeat the question again?

Yes, you mentioned at the beginning that the shift of tonnage, you've seen a big shift of tonnage over the Atlantic Basin of the VLCCs and that it put an additional pressure on the Suezmax rates. I just want to know if that shift, if you're still seeing additional vessels shift over, putting even further pressure, or have you seen the transition of the vessels ease up a bit?

No, I think it's been a fairly steady pace really since the backend of last year as the Middle East has cut production. We're seeing a lot of VLCCs just bypassed the Middle East as a loading area and coming straight from Asia, but to either West Africa or the Caribbean. So it's not something that I think has spiked in under the current environment. It's something that we're seeing quite steadily over the last six to nine months. And again, that's purely a function of the lack of – or the cutting of barrels out of the Middle East. There is very little volume moving AG West and with rates being below OPEC on AG eastbound runs, VLCC owners are doing their economics and seeing that West Africa to China and carriage to China is a better run, albeit at the low levels they are. So that's why you're seeing a steady stream.

And then are there any more synergies to get out of international? The acquisition is that G&A can pull back or will that continue to climb? What are your thoughts on that?

I think that the – obviously with the acquisition of TIL late last year, the ships count going up by 18, we have had some increases in G&A. This quarter's G&A was a little bit higher due to some equity comp that typically expensed in Q1. So it was about $500,000 higher than I would say run rate. So run rate is more like in the probably 9.1 to 9.3 range going forward and don't expect to see it to continue increasing.

That's helpful. Thank you. The next up, just on the – I want a bigger picture question if you don't mind, but could we be in a structural oil decline kind of market given the move to electrify the auto market, the truck market, I guess transportation in general. If that occurs, is that a thing that – a shift that you see that could slower or decelerate the oil demand relative to the amount of capacity that sending the water, that something that you think can affect that that total?

Well, I think certainly longer-term and it's going to have an impact on our own demand, and sort of in the energy demand column. I think the fact that we have to bear in mind though is risk both population growth and the increase of the middle class, particularly in Asia, China and India, that energy demand column is going to be significantly higher. So while oil may drop in terms of percentage against LNG or other forms of energy. It's still going to be a significantly large demand for oil. And I think certainly in the short-term mid-term, I don't think the electrification of either cars or trucks is going to have a material impact on oil demand or tanker demand.

Okay, yes, I know big picture question, but it's helpful to hear the answer. Thank you. You mentioned kind of increased competence as we move later this year. What are your thoughts on the shift between spot and contract? Do you have kind of targets? I know when you first spun off Teekay Tankers there was kind of always a target on what you wanted to look at on the spot versus contract. How do you think about that in this environment?

Yes. Our hedging portfolio management is really something that we monitored constantly. And as you saw us do going into this cyclical downturn, we did seek term cover and more contract cover that sort of bolster our earnings just trying to get through this market headwind. Those contract covers as they come off, we can then evaluate what our view is going forward both on a very short-term basis and on the longer sort of one-year to three-year basis and make our judgments there. I think given the fundamentals and where we think the market is heading, you won't see us take on three-year time-charters at this point, but you may see us go into the market and put away tonnage for short duration six months to 12 months as a hedge against potential uncertainties. At the moment, if you include our lighterage contracts that give us fixed rate cover, we’re around 22% hedged against the spot market.

That's helpful. And Ryan, sorry, if I could just get one follow-up for Kevin. So given that then, what are your view on rates, given what you mentioned before about the pace of scrapping, record scrapping, do you think we've kind of hit a floor from your perspective in looking at the market? Or do you just see this kind of pressure remaining on rates at these levels for a certain amount of time? What are your thoughts on rates?

As I said, we're in the midst of the cyclical lows, but I do think the fundamentals as we've highlighted in the presentation bode well for a recovery as we go to the back end of this year and certainly into 2019.

Okay. All right. Hey Kevin, thank you very much. Appreciate the time.

No worries. Thank you. End of Q&A

And at this time, that will conclude today's question-and-answer session. I’d like to turn the conference over back to Kevin Mackay for any additional or closing remarks.

Thank you very much everybody for joining us and we look forward to speaking to you next quarter.