Welcome to Teekay Tankers Ltd. First Quarter 2024 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 will find a copy of the first quarter 2024 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 first quarter of 2024 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' First Quarter 2024 Earnings Conference Call. Joining me today on the call is 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 $151 million, up from the $127 million we generated last quarter. The company reported adjusted net income of $132 million or $3.86 per share, an increase from $100 million or $2.91 per share in the fourth quarter of 2023. With our fleet of midsized tankers trading almost entirely in the strong spot market, Teekay Tankers' high operating leverage enabled us to continue generating significant earnings. 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 $2.40 of annual free cash flow per share. Stewart will provide further information on this later in the presentation. In March, we completed the repurchase of the remaining 8 vessels on sale-leaseback arrangements for $137 million, reaching the major milestone of being debt-free. With our balance sheet strength, recent financial performance and the positive market outlook, we continue to take a balanced approach to capital allocation. In line with our capital allocation plan, we have declared a fixed quarterly cash dividend of $0.25 per share for the first quarter of 2024. In addition, we have declared a special dividend of $2 per share. Including these dividends, Teekay Tankers have declared cash dividends of $4.25 per share since updating our capital allocation plan last year. Teekay Tankers' midsized spot rates for the first quarter of 2024 were the second highest in the company's history, second only to last year's spot rates.…

Turning to Slide 8, we highlight how well Teekay Tankers is positioned to continue creating significant shareholder value in 2024, a year that we expect to be another strong tanker market. With 98% of our 51 vessel fleet operating in the strong spot tanker market that is being supported by the various factors we have talked about today, we feel confident in our ability to continue creating significant shareholder value. In the first quarter, TNK generated $156 million or $4.54 per share of free cash flow. If we use the trailing 12-month average of TNK's realized spot rates and project that forward, our annualized free cash flow would be approximately $14 per share or a free cash flow yield of approximately 22%. As Kevin mentioned in his opening remarks, Teekay Tankers has reached a milestone by becoming debt-free after repurchasing our 8 vessels on sale-leaseback arrangements during the first quarter. Based on a holistic assessment of the company's position, including being debt-free, continuing strong operating results, our desire to retain capital for fleet rejuvenation and a very positive market outlook, the Board has declared a special dividend of $2 per share for a combined dividend of $2.25 per share, including our regular quarterly dividend of $0.25 per share. With these dividends, Teekay Tankers has returned capital to shareholders totaling $4.25 per share since announcing our revised capital allocation plan in May of last year. I will now turn the call back to Kevin to conclude.

Thanks, Stewart. In summary, the key drivers of the strong markets for midsized tankers remains firmly in place. As we look ahead at both supply and demand, we are increasingly upbeat on the prospects over a multi-year period. In this environment, our high operating leverage continues to create significant value for Teekay Tankers' shareholders. Our Board of Directors' decision to declare a special dividend reflects our balanced approach to capital allocation. While we continue to prioritize building capacity for fleet rejuvenation, the special dividend reflects our optimism about what lies ahead for our industry segment and our company. With that, operator, we're now available to take questions.

[Operator Instructions] We'll go first to Jonathan Chappell with Evercore ISI.

Starting with the market -- one maybe for Christian. Maybe for Christian. Kevin, you could answer it as well. But I think the Slide 4 on the right-hand side is pretty interesting. I mean there's a lot going on in this industry right now and a lot of geopolitical upheaval. Yet, when I look at the Suez and Aframax rates that you put in Slide 4, they're in a super tight range for the last 6 months, obviously at elevated levels, but within a pretty tight range. So just any commentary on why maybe some of the volatility that's usually in this sector and one would conceptually think would be even elevated in this day and age is resulting in such stable yet strong rates in the 2 asset classes where you're primarily involved?

Yes. Jon, Christian here. Yes, I think that was kind of a takeaway as well, in that given everything that's going on in the world and all the events, it is interesting to see that spot tanker rates at least in our sectors have been quite consistent since the winter. And normally, during this part of the year, we would expect rates to fall seasonally going into kind of the shoulder season as refineries go into maintenance. And I think what's worked in our favor since the beginning of the year is that a couple of those event factors have been positive for tonne-mile demand. So you've obviously had disruptions in the Red Sea because of the attacks on merchant shipping, which is some tankers going on longer voyages around the Cape of Good Hope, which has affected both crude and product. It's probably been more pronounced on the product side in the LR2s, but certainly, we've seen some crude diverted as well. And then -- whereas, the Ukrainian attacks on Russian refineries, we've also seen that Russian exports have stayed elevated as well. So I think there have been some factors there that have supported tanker rates during what would ordinarily be a seasonally weaker part of the year. And that probably bodes well for the second half as well, because, as Kevin said in his prepared remarks, we now have the Trans Mountain pipeline coming online and ramping up into the second half of Q2 here. And we certainly expect volumes there to be supportive of Aframax demand as we go into the second half of the year. And we should see more oil volume come online in the second half as well. So yes, it's been a positive development that rates have stayed elevated through Q2, and it gives us some confidence for the rest of the year here as well.

Okay. That's helpful. And then just for my follow-up in the interest of playing the hit. Kevin, I think the special dividend is being widely applauded today. You're down to a net cash position. So I'm just not asking you to completely show your hand, but maybe just a clarification on path from here. If you could just prioritize kind of how you think about this massive cash flow that Stewart pointed out in the coming quarters? How would you prioritize the uses of capital, let's call it, to the rest of '24 and through '25?

Yes. It's obviously a fantastic situation to be in after the markets that we've had to come through over the last few years. But it's something that as a management team in conjunction with our Board, we're always looking at and always trying to discuss. We do have fleet renewal to look at. And although pricing today is elevated on both newbuilds and secondhand, there is a need for us to replenish. As we sell ships, we still want to keep exposure to the spot market because of the confidence we have in the underlying fundamentals of the market. So as we roll off some of the older ships, you may see us use some of that capital to reinvest and keep our spot exposure at a high level. So some of the cash may be used for that. We also have to look beyond that and look to the future as to doing larger fleet rejuvenation exercises, which we're not advocating to do now. But we are cognizant of the cyclicality of our market. And keeping that powder dry for that use is important to -- for us to be able to provide long-term value to shareholders. And then obviously, we understand and fully respect that shareholders would like a yield. And in that respect, our capital allocation plan that we came up with last year, we felt was a prudent long-term orientated plan that satisfied both the rebuilding of the fleet as well as replenishing some capital back to shareholders in the meantime.

We'll go next to Omar Nokta with Jefferies.

Yes, I just wanted to follow up maybe on Jon's question. And I know it's something that we kind of constantly comes up. But clearly, now you're in the net cash position completely debt free. So congrats, obviously, on that. It's been a long time coming. But I did notice you've accounted for 2 ships as available for sale as of the end of the quarter. So it looks like you're going to continue to scale as you were just talking about -- Kevin, you've got 42 tankers in the fleet, after those 2, there's going to be 40. You mentioned looking to replace ships as you sell them. I guess kind of just thinking about that, if we think about the fleet size today, say, post those sales, we'll have 40 vessels, is there a certain critical mass or a certain number that you're comfortable wanting to stay above in order to continue to achieve these types of rates? And should we expect sort of like a sooner replacement of vessels versus what we've seen here over the past few years?

No, I think obviously, scale provides us a lot of optionality to trade in different markets and be able to be in different places as the volatility that is inherent in strong markets plays out, and we want to have enough scale to be able to play across several markets. So as we look at some of the older ships that we sold at the end of last year, we do currently hold a Suezmax and Aframax for sale. Looking just to take value off the table for that older class of ship. If there is an opportunity to find a newer, more modern vessel, yes, we would redeploy that capital to keep the exposure on. But we're not looking at a set number or anything of that nature. It's more around being able to distribute a large enough fleet across several markets to make sure that we can capitalize on the volatility that we expect to continue to see. So that's really how we think about it, Omar.

Okay. And how does [ TCN ] play into that? Clearly, several quarters ago, you brought in a good chunk of ships to take advantage and have that spot exposure stabilize. And that fleet hasn't really grown. Is that an option? Or is it -- do you prefer to do it via ownership?

No. We have a lot of options. We've got a lot of tools in the toolkit. We can -- we've built a good in-charter book. We got in early before the market really took off, and we've really enjoyed the added profit that, that fleet has been able to provide. But we're at a point in the market where there is a bit of spread and it's rather large at the moment between what other owners want for their ships and what we're willing to pay. So you have seen a slowdown. That is a natural effect of the market, reaching the sort of levels that we're seeing. But that doesn't preclude us from adding additional ships. It's just finding the right ship at the right price often in the right location, which has a massive impact on your overall earnings. We have several ships that will be coming off later as their charters roll off, and we've already started discussions with the owners to see if we can find a number that's equitable to both sides to keep those ships on. So it's definitely a tool kit or a tool that we've got in the toolkit that we expect and are always looking to try and utilize. Similarly, as I've been asked on previous calls as to whether we'd lock in our own ships at these kind of levels and put them out. And the answer is the same there. If we can find the right opportunity that pays the right price, we'll certainly execute on it and be able to report on it.

And maybe just one more from me. Regarding TMX as you've been highlighting that the past couple of quarters that we're getting closer and closer to that having an impact. And you mentioned the different potential trade lanes and reverse lighting and whatnot. But maybe -- are you able to give us maybe some perspective on how you think about that market developing? You highlighted how it's somewhat of a remote location relative to the normal trade lanes that Aframaxes will traffic in. How do you think that spot market develops for cargoes there in terms of kind of maybe enticing ships to stay there since it's kind of an isolated area, at least relative to other areas? So I guess maybe how does the spot market play out there? And I know that's kind of trying to give some sort of crystal ball approach. But if not able to do that, maybe just in terms of what you're seeing now in terms of what the rates offered in that region are versus where they are globally on average. Any kind of color you can give on pricing in that region?

Well, first, I think we've got to be honest. We -- as we laid out in our presentation, it's early days yet. The cargoes are starting to come. We've seen a couple of fixtures in the market. From a positive standpoint, for us, they seem to be long haul, both to China and then down to 15 days down to Panama. So where the cargoes go at this point, we don't know. We have to wait and see. We think that there's 4 main options that the customers will take. A lot will depend on oil pricing and the differences between oil prices in different regions, which again, I'm not going to stand here and in any way, try and predict that. What I do think will happen though is the oil will have to move, and it will be priced into the right market. And that will include shipping cost. And if that means that ships in the Far East have an option as they come into North Asia for discharge, they now have an option to look to ballast across to Vancouver and pick up a nice long-haul voyage from there. Similarly, ships that do end up trading into the West Coast or through Panama, they now have the option to go up. So I think it's something that owners will have to wait and see as the trades develop. I don't think necessarily will mean that you'll have ships that will station themselves there. I think they will move in from other regions as and when the requirements pick up. And from the freight standpoint, it will be priced according to the earnings that the owners expect versus relative to what they can do in other markets. But I think the real benefit we're going to see is the additional tonne-miles specific to the Aframaxes because the Aframax is the largest ship you can move into Vancouver. You can put in a smaller Panamax but stem sizes are too big for a Panamax, and you don't have a lot of storage up in Vancouver. So the Aframax really is the vessel that this port needs to use. And I think whether it does go into the West Coast or to [ Light Ridge ] or Panama or to Asia, the Aframax is going to be the ship that's going to have to service that. And it's going to cause dislocation. It's going to pull ships from the U.S. Gulf. It's going to pull ships from Asia, and that's going to benefit possibly Suezmaxes and other Aframaxes in those regions as the supply diminishes.

Yes. It will be very interesting to see how it starts to develop here in the next few months. I really appreciate that perspective.

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

And Kevin, I guess, just to follow on that thought process, right? If we get those moving down into California, I guess then you'll still have a product that needs to move the longer haul that replaces that, right? The product that California would have been sold in you'd make up with even longer hauls?

Yes. I think you'll -- at the moment, you could see Canadian crude backing out some of the long-haul Arab barrels, which will -- they'll displace those barrels and they'll have to go somewhere else. So that's what's really exciting about this development. It's going to impact primarily and initially the Aframaxes, but it could have knock-on effects into other areas as well, which is going to be interesting to see how it develops and to be able to react to that.

So I guess a follow-up, Christian talked about rates earlier to Jon's question, but Afras seemed to be getting hit, I guess, relative to your quarter-to-date rates that are booked, right? So going from about $48,000 to $44,000 a day, while Suezmaxes are flatter at 47 to 45. I guess just is the market not anticipating or adjusting for that potential Aframax tightening yet? Or is it just too early to react to TMX at this stage?

I wouldn't read into such a small differentiation on the rate, especially at rates in the mid-40s, we haven't seen these rates in 20 years. So I think it's a function of the elasticity of the fleet moving up and down. And I think the U.S. Gulf market is probably one of the most volatile. You can have rates dropping to $30,000 a day. And within a week's time, they could be back up at 65. So I think we've got to look at -- or if we are trying to look at what patterns develop, I think we've got to look at it over a much longer period. It's not -- I wouldn't read into it too much in the short term. And I think the market can't -- the market isn't going to front run the rates in anticipation of the cargoes. We have to wait until the TMX volumes come in and they come in at the levels that the pipeline owners have indicated. And when we see the volume, that's when I think you'll start to see the impact on the Afras.

Yes. So gradually, right? Even though it's not all just -- once you open up in May as you get those volumes coming online through the year. So you noted tougher discussions on charter-in rates or even your thoughts on charter outs. How about the purchase price of new vessels? And Kevin talked about -- or I'm sorry, Stewart talked about the fleet renewal process. What are your thoughts on entering that low order book? Or are rates just uneconomical given where -- I mean, I guess, if you're talking mid-40s, when does it become economical?

Yes. It's certainly an interesting challenge to think through because we have to acknowledge that both secondhand pricing and newbuild pricing is high. But as you said, so is rates. So I think all I can speak to our thoughts on that, Ken, is that as of today, we haven't ordered any new ships at these pricing levels. And if we are going to do anything, I think you'd probably see us chipping away at the secondhand market first. Just to replenish the lost spot exposure from the sale of the 2 ships that we had in December and January. And if we do sell to more you'd probably see us in the secondhand market trying to replace those because you really -- if you're paying these kind of prices, you want to have those ships earning from day 1, and you want them earning $40,000, $45,000 a day like we are today. So it would be more prompt purchasing than looking towards more of the longer-term replenishment.

And with no other questions holding, I would like to turn the conference back to the company for any additional or closing comments.

Thank you for joining us, and we will speak to you next quarter.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.