Welcome to the Teekay Tankers Ltd. Third Quarter 2023 Earnings Results Conference Call. [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.teekay.com, where you'll find a copy of the third quarter 2023 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 third quarter 2023 earnings release and earnings presentation available on our website. I will now turn the call over to Kevin Mackay, Teekay Tankers' President and CEO, to begin.

Thank you, Ed. Hello, everyone, and thank you very much for joining us today for Teekay Tankers' third quarter 2023 earnings conference call. Joining me on the call today are Stewart Andrade, Teekay Tankers' CFO, and Christian Waldegrave, our Director of Research. Moving to our recent highlights on Slide 3 of the presentation, Teekay Tankers generated total adjusted EBITDA of approximately $106 million in the third quarter, up from the $92 million we generated in the same quarter of last year. We reported adjusted net income of approximately $77 million, or $2.24 per share, an increase from last year's third quarter levels of $58 million, or $1.70 per share, respectively. Our significant operating leverage, combined with the historical high third quarter spot rates resulted in Teekay Tankers generating our highest ever third quarter adjusted net income. As a reminder, for every $5,000 increase in tanker rates above our free cash flow breakeven of $16,000 per day, we expect to generate approximately $2.60 of annual free cash flow per share. We will provide further information of this later in the presentation. In line with our fixed quarterly dividend policy, we have declared a cash dividend of $0.25 per share for the third quarter of 2023. As previously announced, we completed the repurchase four vessels, which were on sale-leaseback arrangements, for $57 million. These vessels were financed with our $350 million revolving credit facility. In the market, rates remained firm on a historical basis, with average mid-size rates the highest for a third quarter in 15 years. These high average spot rates were achieved despite spot tanker rates declining in the second half of the quarter due to a combination of reduced exports from OPEC+ and normal seasonality. Spot tanker rates have, however, firmed significantly once again through the early part of…

Thanks, Kevin. Turning to Slide 8, we highlight the significant shareholder value and increasingly strategic optionality being created by Teekay Tankers. With almost all of TNK's 53 vessel fleet trading in the firm spot market, our high operating leverage once again enabled us to generate substantial free cash flow. In the third quarter, which had seasonally lower rates, particularly in August, we generated $98 million of free cash flow. If Q3 2023 spot rates are forecast for the next 12 months, we would expect to generate about $350 million in annual free cash flow, or $10.25 per share annually, equating to a free cash flow yield of approximately 20%. Generating almost $100 million of shareholder value in the seasonally weakest quarter of the year clearly demonstrates how well Teekay Tankers is positioned to create value in this market. Considering a full year of spot rates, the chart on the slide also shows our forecast annual free cash flow based on average spot rates achieved by Teekay Tankers in the last 12 months. With these rates, TNK is forecast to generate over $18 per share of annual free cash flow, equating to a free cash flow yield of approximately 36%. With the tanker market now in its sixth consecutive strong quarter, and with the market fundamentals pointing towards sustained strong market, we believe the company is very well positioned to continue creating shareholder value and strategic optionality. In terms of our financial position, we have leveraged our strong cash flow generation and our increasing financial strength to further optimize our balance sheet. Since March of this year, we have repurchased 19 vessels from sale-leasebacks for a total of $364 million. Refinancing these vessels into a revolving loan facility has allowed us to maintain readily available capacity to take advantage of opportunities while paying down debt balances and reducing interest expense. In addition, given our financial position, we elected to terminate our $80 million working capital loan facility. These steps have allowed us to further reduce our breakeven levels and increase value creation for our shareholders. Looking forward, we have eight vessels remaining in sale-leaseback arrangements, for which we have purchased options totaling $137 million, available beginning in the first quarter of 2024. While still dependent on market conditions, we anticipate exercising those options and completing that phase of our balance sheet optimization. Finally, as mentioned on the last call, we are in a net cash position, which reached $83 million at the end of the third quarter. I will now turn the call back to Kevin to conclude.

Thanks, Stewart. In summary, with vessel fleet growth that is essentially fixed at a very manageable level for the next few years, we see the potential for a strong and healthy extended run for the overall tanker market and for Teekay Tankers, in particular. Our spot market exposure, strong financial position, and focused participation in the mid-size crude segment is, in our view, putting us in a very good position over the next few years to capture both opportunities and added value for our company. With that, operator, we're now available to take questions.

[Operator Instructions] And we'll pause for a moment to allow everyone an opportunity to signal for questions. Our first question is coming from Jon Chappell with Evercore.

Thank you. Good morning or good afternoon. Stewart, if I can start where you left off, on the creating significant shareholder value and strategic optionality. Should we think about this 1Q '24 eight remaining vessels on sale and leaseback kind of the clearing event? You know, you've generated a ton of cash. The net cash position has continued to move up. The most delevered balance sheet in the industry. One special dividend, but maybe, you know, how do we think about capital allocation going forward? Do we just have to finalize this one last piece of the balance sheet restructure and then we can think about capital returns being ratcheted up?

Hi, Jon. Yes, thanks for the question. I see the final sale-leasebacks and acquiring those as really an incremental step as - in terms of optimizing the balance sheet and not really a major event. It's just a progression. As we've said in our prepared remarks, we're in a net cash position, and that's not going to change significantly when we purchase those vessels back. We came out with the capital allocation plan six months ago, which, as you know, included a fixed dividend when we announced it. We also paid a $1 special dividend and we put a share buyback program in place. And I would say in broad terms that the market has unfolded roughly in line with what we expected when we put that in. We've been very bullish on the tanker market, and it's delivered over the last six months. So I don't see any change in our capital allocation in the near term. Of course, we understand that shareholders are interested in a return of capital, and we have the tools in place to do that. Anything above our quarterly fixed dividend will be, you know, subject to discussions that we have with our Board and making decisions to return anything in addition to the $0.25 a quarter. And when we announced the policy, if you recall, we said that that's something that we would likely do on a periodic basis, and that's still our plan going forward.

Okay, thank you. And then just a follow-up to Kevin on strategic optionality. So, you know, asset values continue to move higher. You've just laid out a very optimistic view on the market for the next two years to three years, which would make me think that there is more willing buyers than willing sellers that continue to put pressure - upward pressure on asset values. When you think about the modernization of your fleet, could you also consider - and I think I asked this in a different way last quarter, so forgive me, but could you modernize the fleet by, you know, selling older tonnage at, you know, pretty premium prices as opposed to what I think some people fear is a rock and a hard place of going out and buying assets at a peak?

Yes, I think it's an arithmetic question. If you sell older assets, your average fleet age comes down. But the way we look at it is, what is the best thing to do with our fleet? And at this point in time, we're extremely comfortable with where our fleet stands today. You know, it's in line with industry average profiles. It's in a fantastic segment in the mid-size tanker space, and we're - you know, we're benefiting from the ton-mile increases as a result of Europe banning the Russian imports. But you know, the world - there's a lot going on right now. And in our view, there's really no rush to do anything. We're really in a good position. So, our forward view of the market is strong. We can continue to trade our assets for several years into the future without any difficulty. We could - as you mentioned, we could also sell, and with asset prices being high, we keep our options open. If we're offered, you know, a very nice opportunity to sell an asset and add incremental value above what our forward expectations are, we'll obviously consider that. But it's really a portfolio view that we take on the fleet and, you know, I don't see the need with the strategy that we have, I don't see the need right now to pull the trigger to do anything immediately.

Okay, I appreciate it. Thank you, Kevin. Thanks, Stewart.

Thanks, Jon.

Thanks, Jon.

Our next question coming from Omar Nokta with Jefferies. Your line is open.

Thank you. Hi, Kevin and Stewart. Good morning. Yes, just - yes, following up, I guess, on Jon's line of questioning and also kind of basically the same topic that seems to come up each quarter is, yes, just indeed the - you know, the thought process or kind of what your strategic plans are longer term. I guess, you know, Kevin, you pretty much out - laid it out there that you're comfortable, you've got the fleet you want. It's generating a good amount of cash, especially in today's market. But you don't feel the pinch to go out and do anything in terms of acquiring assets. And then you mentioned if somebody were to present you with an offer on some ships, you'd be happy to entertain it if it was good enough. I guess, kind of in the bigger picture, grand scheme, when you think of, say, Teekay Tankers going forward, would you characterize it as perhaps maybe like a closed-end fund where you're generating strong returns, you're giving it - right now, you're repaying down - you're paying down debt and strengthening the balance sheet. But do you see it evolving to where it just becomes a capital return story and then eventually selling the company altogether?

I think the way we look at it, Omar, is, you know, we've put ourselves in a very good position. We have a fleet that is facing a very strong market, and we believe we've got the fleet that's in the sweet spot in the tanker space, in that - the mid-size tankers. We're benefiting from what is going on in the world right now and the durable ton-miles that have increased significantly. The industry's fleet profile is aging. So, there is - and Teekay Tankers is no different in this. There is a need to do fleet renewal at some point. But we also feel that, you know, there's no need to rush into that. We've got time. And yes, we can sell some of our older assets, and we may do so. But in the meantime, we want to try and maximize our exposure to the strength of this market and keep ships, you know, bringing in rates that we're getting today at $70,000 a day. That is adding shareholder value, in our view. So, in the future, we'll deal with what comes our way. But for now, it's really around maximizing the potential of the fleet we've got before we take any further steps to rejuvenate it.

Maybe just following up on that a little bit, Omar, if we were viewing it as a closed-end fund, I think you'd see us being a significant dividend payer and distributing the capital that we're generating. We're not doing that. We're holding on to the capital and creating capacity to be - to reinvest in the fleet. And that wasn't in our prepared remarks this quarter, but certainly last quarter, that our focus is putting ourselves in a position to reinvest when the time is right and in an investment that we think will be accretive and add value for our shareholders.

Okay, thanks. Thanks, Stewart and Kevin. That's helpful. I guess and - you know, you've been on this plan for perhaps maybe four years or five years where you really focused on deleveraging. You went from a very high leverage ratio to now, you know, net cash. And so, you've been playing the long game here. So, I guess, this is - basically what's happened is you've taken advantage of a strong market to delever. You've gotten yourself in a great financial position. You're now harvesting all the excess cash flow and just enjoying it, providing you tremendous flexibility. But in terms of, you know, looking to invest, basically you just need to wait for the - perhaps, I guess, the next part of the cycle, whether that takes two years or three years. If we're in this tanker market upswing that lasts into, say, '25, '26, can we just expect Teekay Tankers to just hang back, generate that cash flow, build up a nice cash cushion, and then once the cycle turns, that's when you're going to deploy capital in a different manner?

I don't think it's that binary, Omar. I think that, you know, there - opportunities arise at different times. We always are evaluating opportunities for investment, whether that's in one vessel, a fleet of vessels, or what have you. So - yes, so our view is that it's not that binary, and we're always looking for ways to do deals that can create value, and we will continue to do that. Our - guess, our message is that we are being disciplined and we'll only do deals that we think will create shareholder value.

Yes. Thank you. Thanks, Stewart. That's clear. And yes, I'll turn it over. Thanks again, Kevin.

Thanks, Omar.

Our next question is coming from Ken Hoexter with Bank of America. Your line is open.

Hi, this is Nathan Ho dialing in for Ken Hoexter. Congratulations on the great results. I guess, I just wanted to follow this train of thought on the long game that Teekay Tankers is playing here. I mean, like - many times over the call, it's been referenced that rates are currently historically strong. And you know, with Afra and Suez rates here in the 70s and the 80s, I guess, I just - I'm curious as to what management is thinking about spot exposure over the long term. As in, I understand that the spot fundamentals are still very much intact, but are there any considerations and bring that 96%, maybe down into say, like the 80s or the 70s? Maybe talk a little bit about demand for longer-term charters from some of the charterers out there?

Sure, Nathan. It's a good question, actually. At the moment, we're 96% exposed to the spot market. We're confident that the fundamentals are there for this spot market to continue at these sorts of levels we've been seeing this year. So, really, in our view, it makes more sense to be more spot exposed, say, than to start locking in time charters. If you look at the forward order book, that supports the longer view. You know, that's why we want to be, you know, incrementally more exposed to the spot market. Having said that, and I've said this almost on every call, every quarter, is we always, on a daily basis, keep our eyes open on the time charter market, both to out-charter or to in-charter. And if we see opportunities where a customer is willing to give us fixed rate employment for a year or a number of years at rate levels that we find so attractive, then we will deploy that ship to that customer and do those deals. Similarly, if we find an owner who is willing to give up a ship at a rate where we feel we can make a margin by trading that ship into our fleet in the spot market, you'll see us take ships, as we've done with the eight-ship fleet that we've in-chartered over the last 18 months. So it's not a mathematical equation. It's more of a sense of where we think opportunity lies. And at the moment, we feel that the - having a higher percentage of our fleet in the spot market is where we're going to generate the most value. But as I said, that gets evaluated on a daily basis and it could change as we move forward. A lot depends on the opportunities that get presented to us.

Great. That's really helpful. Thanks, Kevin. I mean, yes, like the $21,000 - $22,000 per day charter-in, that was very well done. Just to follow up a little bit more on the sale-leaseback side of things, clearly, interest rates are rising, which I'm sure was an offset, but maybe, Stewart, could you just remind us again on the financing benefits from the repurchase this quarter, as well as the one in 1Q '24? Thank you.

Sure. So, this quarter, we repurchased four vessels, which were on sale-leaseback, for about $57 million. Those have been on leases, which were at LIBOR plus - or SOFR plus 285. And we have eight vessels that we can repurchase in Q1 of next year. The purchase option price on those is about $137 million, and those are currently on at SOFR plus 275. So, about - both of those were - effectively 8.4% interest we were paying on those. So that's what we'll be - that's what we purchased back and will be purchasing back in Q1. So, all told, for 2019 - or for 2023 and Q1 of 2024, that's - that'll be a total of $532 million of leases that we will have bought back. And that's probably in the neighborhood of about $20 million a year interest savings in terms of the optimization from doing that instead of carrying those leases.

Perfect. Thank you so much.

You're welcome.

And there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.

Thank you for joining us today, and we look forward to speaking to you next quarter.

This concludes today's call. Thank you for your participation. You may now disconnect.