Welcome to Teekay Tankers Ltd.'s Fourth Quarter 2022 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 the company. Please go ahead.

Before we begin, I would like to direct all participants to our website at www.teekaytankers.com, where you will find a copy of the fourth quarter and annual 2022 earnings presentation. Kevin and Stewart 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 fourth quarter and annual 2022 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Mackay, Teekay Tanker's President and CEO, to begin.

Thank you, Ed, and hello, everyone, and thank you very much for joining us today for Teekay Tanker's fourth quarter and annual 2022 earnings conference call. Joining me on the call today are Stewart Andrade, Teekay Tanker CFO; and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation. Teekay Tankers generated total adjusted net income of $147.5 million, or $4.33 per share, up significantly from a strong third quarter adjusted net income of $57.9 million or $1.70 per share. To put this in context, it is Teekay Tankers' highest ever quarterly adjusted net income. We have given notice to exercise purchase options on nine vessels currently in sale leaseback arrangements for a total of $164 million. Related to this, we have also signed a term sheet to refinance 19 vessels under a $350 million revolving credit facility. By taking these actions, we will eliminate some of our more expensive debt, thereby reducing our already competitive fleet breakevens, and we will improve our ability to optimize our balance sheet on an ongoing basis. We expect to complete the facility by the second quarter of 2023. With 51 vessels or 96% of our fleet operating in the spot market, we have high operating leverage that has served us well in this very strong market. To illustrate that point, we generated $4.84 of free cash flow per share in the fourth quarter alone. This equates to more than a 50% annualized free cash flow yield based on our closing share price yesterday. As a guideline, for every $5,000 increase in rates above our $15,000 free cash flow breakeven level, we expect to generate approximately $0.65 per quarter, or $2.60 per year of free cash flow per share. I would also highlight that we generated $20…

Thanks, Kevin. Turning to Slide 9. We highlight the company's high operating leverage and what that means for TNK's capacity to generate cash flow and create shareholder value in a strong tanker market. Throughout 2022, our focus has been on strengthening our financial position and creating equity value for TNK shareholders, generating $318 million of free cash flow in 2022 enabled us to reduce our net debt by 41% to $345 million, bringing our net debt to cap down to 24% at the end of 2022. Importantly, this cash flow increased TNK's equity value, thereby creating value for our shareholders. We have 51 vessels or 96% of our fleet trading in a very strong spot market that is supported by solid fundamentals, positioning TNK to continue generating significant free cash flow. As can be seen in the chart, our fleet-wide free cash flow breakeven level, including dry docking and other capital expenditures is approximately $15,000 per day. For every $5,000 per day increase in spot rates above this level, the company is expected to generate approximately $90 million, or $2.60 per share in annual free cash flow. While this is not a projection of future rates, to illustrate this point, if fourth quarter spot rates were to be sustained throughout 2023, we would expect to generate approximately $20 per share of free cash flow for an annualized free cash flow yield of over 50% based on our closing share price yesterday. It is important to also consider the role of our in-charter portfolio, which is having a material impact on our earnings beyond that of our owned fleet. Historically, we have taken advantage of opportunities to increase our exposure to promising spot markets by expanding our in-charter portfolio. For example, when we last significantly increased our in-charters in anticipation of a strong spot market in 2015, our 11 in-charter tankers generated $44 million of incremental free cash flow in just one year. There's a similar dynamic playing out now for our in-chartered vessels generated $20 million of incremental free cash flow in the fourth quarter alone, and our current eight tanker in-charter portfolio has a mark-to-market value of approximately $60 million. I will now turn the call back to Kevin to conclude.

Thanks, Stewart. In summary, the spot market for midsized tankers has remained exceptionally strong, and the combination of structural shifts in the global crude flows, a record low order book that is essentially capped through the medium term, and multiple drivers of demand growth are conditions supportive of a strong market for some time, even in the face of potential macroeconomic headwinds. The positive ton mile impact related to Europe's ban on Russian crude imports are durable and have accrued disproportionately to midsized tankers, and rates for both Aframax and Suezmaxes have outperformed all other vessel classes in recent months. In line with our stated priority, our 2022 focus has been on balance sheet strength, and the sharp improvement in the spot market in the second half of the year enabled us to significantly strengthen our balance sheet. Moving into 2023, our operating leverage puts TNK in a position to continue generating a great deal of free cash flow in a strong tanker market. While continuing to build financial capacity, the company will need for future fleet reinvestment, the additional cash generation allows for a broader range of options to be considered in our capital allocation planning for the year. As with all our decisions, we will continue to be guided by discipline and the goal of creating long-term shareholder value. With that, operator, we're now available to take questions.

Thank you. [Operator Instructions] And we'll go first to Jon Chappell with Evercore ISI.

Thank you. Good morning or good afternoon. Stewart, I want to start with the debt side of things. A couple of announcements here, and I just want some clarification, so bear with me. It's a multiparter, but hopefully pretty simple. These non-sale and leasebacks, is that the end of them? Then the $350 million that you're hoping to draw in this new facility in the second quarter, obviously, significantly more than the $164 million, are you using that to pay your existing non-sale leaseback facilities? And then the final part of that is, what's the savings from the $350 million that you're drawing down in the second quarter to what you would be used to pay down with those proceeds?

Yeah. Thanks, Jon. Good afternoon. So yeah, there are a few moving parts here, so let me try and kind of walk through it. So first of all, as you mentioned, we're -- have given notice to exercise non sale-leaseback purchase options. We'll be repurchasing those in March with cash on hand. Related to that, however, we are putting in place a new $350 million debt facility. That revolver will ultimately finance 19 vessels. So in addition to the nine vessels that we've already given notice on, we'll be giving notice on another 10 vessels this quarter. Four of those late in the year, but the rest of them by the end of Q2 and joining that sale-leaseback facility. So 14 vessels will be -- pardon me, 15 vessels will be done in Q2, four vessels in Q4, all of them going into that $350 million facility. At the end of that, we'll only have eight sale leasebacks remaining. And in terms of the savings, it really depends on the spot market how much cash we generate. The two areas of savings from for making this change, one is we're at a lower cost of borrowing. And the second one is it allows for more efficient cash management by being able to have a revolver, which we can kind of use dynamically. So overall, we are expecting about $8 million in savings on a run rate basis per year, but that really will depend on how much cash we generate.

Okay. No, that helps. I was looking for the spread on the current rate versus the new one, and I figured it would be much lower in this environment in this balance sheet. Kevin, your last point on capital allocation, things are happening really quickly here. The fourth quarter was amazing, the first quarter even better. If I just look at this chart you put on, on Slide 9 and not even having to extrapolate beyond, whatever, 40 days from now, that first quarter-to-date average rate free cash flow equivalent for the quarter, your net debt at $345 million would be cut by more than half just by March 31. What's the timing on the potential shift in this capital allocation? I mean, I know this is something we've asked in the past. I know it's something we've been talking about for years now. The heavy lifting on the balance sheet is done. You're in a phenomenal position. Your operating leverage is incredibly strong, but you do kind of stand out as one of the very few tanker companies that haven't started the capital return machine. And arguably, you're in the best position to do it out of any of them. So what can we think about the timing and the magnitude here?

Yeah. That's fair, Jon. It's a good question. Talk about 2022 first. As you said, things have moved very quickly, and the Q4 was a fantastic quarter. It's certainly better than our initial expectations going into it. So that really allowed us to close off what we've been saying all last year, which was our focus and our channeling of our cash generation would go to paying down debt and strengthening the balance sheet. So we're really pleased with the way we've been able to close off our 2022 plan. We now need to look at 2023, and we started the year off extremely well, even better on the Aframaxes in Q4. So the debt is coming down very quickly. And we do recognize that in this position, with this level of cash generation and with a forward view that the market should remain strong, maybe, perhaps not at these levels, but certainly strong throughout the year, that does afford us optionality other than just looking at balance sheet strength. So as we sit down with our Board, we will be talking about 2023 and what we do with the cash. Part of that discussion will be around the third leg or the third phase that I think Stewart has spoken about on previous call last year about building that financial capacity to be able to do some significant fleet renewal when the opportunity arises. But I think we also can talk about other options. So that is certainly something that we plan to do.

Okay. Just out of curiosity, move on the, when is the next board meeting? .

Our next board meeting is in March.

Okay. Great. Well, thanks for the time, Kevin. Thanks, Stewart.

Thank you, Jon.

We'll go next to Ken Hoexter with Bank of America.

Hey, Stewart. Hey, Keving. Hi. This is Nathan dialing in for Ken. Just wanted to get a bit more color on how the team is seeing the macro environment as well as spot market here. We noticed that there were some simultaneous charter-in, charter-outs over the fourth quarter, earning a very decent spread. Would you mind maybe talking a little bit about the availability of these opportunities and what your view is on like future charter out opportunities? Thanks.

Yeah. Hi, Nathan. I think we covered a lot of ground in our prepared remarks and our presentation just about the macro environment. I think one of the things that is really missed in articles and general view on the tanker market, there's a view on the clean space, and there's a few on the crude space, but it's a lot more nuanced than that. And we're trying to highlight that within the crude space, the real beneficiaries of the macro developments that we've seen in 2022 and what we expect to continue in 2023 is that the midsized Aframax and Suezmaxes are the real beneficiaries of the ton mile growth. And that is why we feel that the durability of those fundamentals are there, and this isn't -- the spikes that we're seeing aren't seasonal or aren't short-term sanctions sort of related there. They're far more durable than that, which is what's giving us a bit more confidence as we look forward. In terms of our in and out charter, it's one of those tools in our toolkit that we have used very well in the past. As we gain confidence in the market's ability to generate income, we're willing to go out and take positions on vessels with owners that we have good relationships with that are making -- maybe looking for a bit more security as rates move up. And we can take those vessels and trade them within our program and make a very healthy margin. Obviously, as the spot market creeps up, the time charter market also starts to creep up in tandem. And as we look at managing the risk reward, if you will, we do look at hedging some of the positions that we take in. So for example, we took in a ship early this year at about $30,000 a day and automatically flipped it out at $48,000 a day. So we're locking in a spread over the first year, which pays down the asset and gives us a cheap vessel going into the second year with an option to extend it for a third year. So that's kind of how we look at how we play the in and out charter in a market like this, but it's certainly something that we've done in the past to good use. And as Stewart mentioned in the finance slide, our mark-to-market on these charters if the market stays strong, could add another $60 million to our war chest.

Got it. That's helpful. And just as a follow-up, there were some brief mentions about the emergence of an illicit fleet following the December price cap on Russia seaborne exports. Could you maybe talk a little bit about the magnitude of that and how it's affecting the capacity and scrapping from your purview? Thanks.

Sure. The illicit fleet, as you call it, generally, I think we tend to call it the shadow fleet. It's vessels that are owned by one-off companies in various parts around the world, the Middle East, China, for example, and they trade Russian oil or they carry Russian oil from exports out of Russian ports into mainly China and India. In terms of scale and size, I know on the Aframaxes, there's roughly about 150 Aframaxes that are in that trade, that the tracking services have listed. I think on the Suezmaxes, it's about 70. If I remember, maybe Christian has a more accurate number, but it's a significant size of fleet is servicing that trade. The good thing is that those ships are being pulled out of the regular trades, that companies like Teekay Tankers are willing to participate in, and that's why you're seeing the spikes that we're getting than we had in the fourth quarter, and we're enjoying now in the first quarter as well.

Great. Thanks, Kevin and congrats again on the great quarter.

Thanks, Nathan.

We'll go next to Omar Nokta with Jefferies.

Thank you. Hi, Kevin. Hi, Stewart. I wanted to just follow up on Jon's line of questions. Obviously, things have been much stronger than anticipated, and they're happening very quickly. You are on pace to get into, I would say, a net cash position here in a not-so-distant future, which really does kind of cap the -- or at least, closes the book on your years long, I would say, efforts to reduce debt. And from your comments, it sounds like here in '23, you're preparing to shift capital allocation. You're going to be sitting with your Board potentially as soon as March, as Jon asked. I guess, maybe you, Kevin, and sort of as management, am I reading correctly that your preference in terms of shifting that capital allocation is towards renewing the fleet versus paying out dividends?

No, I wouldn't categorize that at all. I think we have to be realistic. Teekay, like any ship owning company, has assets with finite lives. And as we generate income, we have to be prudent about reserving some of our earnings to invest in renewing our fleet and renewing our business. But we're fully aware that a capital allocation strategy or plan, which we do talk to our Board about every meeting, can include other options. And as we continue to generate the levels of cash flow that we've seen in the fourth quarter, and here so far in the first quarter, it does give us the options to look at other avenues. And we are fully aware that we have shareholders that do like capital return, and there's various forms of doing that. So it allows for a very healthy open, robust discussion with the Board about what the best approach is, but we're not fixed that all of it has to go in one direction or another. It's setting everything on the table. And as we look at the forward view of our market and as that market develops some changes, it is looking at how we think the best to deploy that capital for the benefit of shareholders over the long term.

Yeah. Thanks for that, Kevin. That's fair and clear. Can we sort of expect maybe a broad sort of action plan coming out of, say, this March meeting. I don't know if we should be -- we're thinking too much of this upcoming Board meeting. But generally speaking, should we be thinking here in the next couple of months maybe that Teekay Tankers will be announcing a new plan of action?

No. I think what you can expect is that the management will be having, as we do have robust conversations with our Board at all of our meetings, and don't read into a March Board meeting coming up. The decisions when they're made will be -- we'll communicate them, as we did last year when we spoke to the market. And we were, I think, quite clear that we were channeling our cash generation towards debt repayment. If that changes, we will communicate it once that decision is made. But I don't want to preempt the conversation or the discussion with the Board or what decision they and us together planned on.

Yes. No, I completely understand that. Okay. And then maybe just as a kind of thinking about, say, fleet renewal because it is important, as you highlight, have you given some thought as to how does that fleet renewal look for you going forward? How do you go about -- I mean, obviously, the balance sheet and it's just about in tip-top shape as it can be. How do you think about fleet renewal from here? What's the avenue of going younger as you think about that?

I think, as always, it's going to be a combination of different elements, whether it's going into the secondhand market and doing a series of transactions or whether it's placing newbuild orders or, as we've done in the past, where we do on block transactions on a larger scale. It could be all of those. It could be one of those. It really comes down to the opportunities that develop over time. And our expectations for the returns of any given investment opportunity. So we keep a very open mind. We're agnostic to how we go about it. But it really, at the end of the day, has to provide good returns and a good investment, so that we can drive value for shareholders.

Got it. Yeah. Thanks, Kevin. And one final one, and I'll turn it over. You did mention in your opening comments just the separate topic, the Aframax LR2s are now blended together as you report the average rate. And just want to make sure that -- I know in the past, you've focused a lot of the LR2s on the dirty trade. Is that basically how it is going forward effectively now, the LRs you have are trading in the crude market currently and going forward?

Well, we have nine owned LR2s. On past calls, I think the fleet that was trade -- or the LR2s that were trading in the clean market, we've increased it to three. That has subsequently dropped as the clean LR2 market dropped off and crude stayed high. We converted a couple of ships into the crude side. So we're down to one pure clean LR2 at the moment. I think I've described this before, we really look at the LR2 as a fungible asset, and we trade it on a voyage-by-voyage basis. So there is some of our LR2s that are currently dirty that we're keeping an eye on. We're potentially cleaning up as the LR2s start to spike again here. But in terms of the fleet, we don't separate the 2 units out. We trade it as one fleet, and that's why we've changed the way we report it.

Nicely. Okay so that nature relationship will continue to exist. Okay. Well, great. Thanks for answering my questions and congrats on the record quarter, guys. Thank you.

Thanks, Omar. Appreciate it.

At this time, there are no further questions. I'll turn the call back to management.

Thank you for calling in, and we look forward to speaking to you in the future.